<PAGE>
As filed with the Securities and Exchange Commission on September 17, 1999.
Registration No. 333-60765
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
CYNET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 7370 76-0467099
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
ORGANIZATION) CODE NUMBER)
12777 JONES ROAD, SUITE 400
HOUSTON, TEXAS 77070
(281) 897-8317
(ADDRESS AND TELEPHONE
NUMBER OF PRINCIPAL
EXECUTIVE OFFICES)
COPIES TO: SAMUEL C. BEALE
JAMES J. SPRING, III VICE PRESIDENT - GENERAL COUNSEL
CHAMBERLAIN, HRDLICKA, WHITE, CYNET, INC.
WILLIAMS & MARTIN 12777 JONES ROAD, SUITE 400
1400 TWO ALLEN CENTER HOUSTON, TEXAS 77070
1200 SMITH STREET (281) 897-8317
HOUSTON, TEXAS 77002 (NAME, ADDRESS AND
PHONE (713) 658-1818 TELEPHONE NUMBER OF
FACSIMILE (713) 658-2553 AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to
Rule 434, check the following box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /X/
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed
Amount Maximum Proposed Maximum Amount of
Title of Each Class of Securities To Be Offering Price Aggregate Registration
To Be Registered Registered Per Unit Offering Price Fee
<S> <C> <C> <C> <C>
Class A Common Stock(1) 3,649,635 $1.37 $5,000,000 $1,475
Class A Common Stock(2) 5,514,491 (3) $8,138,876 $2,401
Class B Common Stock(2) 2,719,733 (4) $5,418,574 $1,599
Series A Preferred Stock(2) 103,500 $2.00 $ 207,000 $ 61
Series B Preferred Stock(2) 77,349 $3.00 $ 232,047 $ 77
Warrants to Purchase Shares of Class A Common Stock(5) 799,000 (5) $ 201,640 $ 59
Class B Common Stock Underlying Warrants(6) 2,200,000 $1.00 $2,200,000 $ 649
------
Total $6,321
------
------
</TABLE>
- --------------------------
(1) Represents securities to be issued in connection with the funding of the
rescission offer described in the prospectus which is a part of this
Registration Statement.
(2) Each of these securities is the subject of a rescission offer to be
commenced following the effectiveness of the Registration Statement, as
more fully described in the prospectus which is a part of this
Registration Statement.
(3) The shares of Class A Common Stock that are subject to the rescission
offer were issued in exchange for cash and services rendered at prices
ranging from $0.39 to $2.00 per share, and include shares issued following
the conversion of 3,364,354 shares of Series A Preferred Stock that were
originally sold at prices ranging from $1.43 to $2.00 per share.
(4) The shares of Class B Common Stock that are subject to the rescission
offer were issued in exchange for cash and services rendered at prices
ranging from $0.25 to $2.73 per share, and include shares issued following
the conversion of 1,717,891 shares of Series B Preferred Stock that were
originally sold at $3.00 per share.
(5) Warrants to purchase shares of Class A Common Stock represent (i)
warrants to purchase 738,000 shares issued in exchange for services
rendered valued at $0.26 per share and (ii) a warrant to purchase 61,000
shares issued in exchange for services rendered valued at $0.16 per share.
(6) Represents shares of Class B Common Stock underlying certain warrants
that have not yet been exercised.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION DATED SEPTEMBER 17, 1999
PROSPECTUS
CYNET, INC.
--------------------------------------------------------------------
SECURITIES SUBJECT TO RESCISSION OFFER TO PURCHASE:
5,514,491 SHARES OF CLASS A COMMON STOCK
2,719,733 SHARES OF CLASS B COMMON STOCK
103,500 SHARES OF SERIES A PREFERRED STOCK
77,349 SHARES OF SERIES B PREFERRED STOCK
WARRANTS TO PURCHASE 799,000 SHARES OF CLASS A COMMON STOCK
SECURITIES TO BE ISSUED TO RESCISSION UNDERWRITERS:
3,649,635 SHARES OF CLASS A COMMON STOCK
SECURITIES OFFERED BY SELLING SHAREHOLDERS:
2,200,000 SHARES OF CLASS B COMMON STOCK UNDERLYING WARRANTS
---------------------------------------------------------------------
CyNet, Inc., a Texas corporation (the "Company"), is offering, upon
the terms and conditions set forth herein, to rescind the issuance or sale of
an aggregate of (i) 5,514,491 shares of no par value Class A voting common
stock ("Class A Common Stock"), including 4,036,725 shares issued upon
conversion of the Company's Series A convertible preferred stock ("Series A
Preferred Stock") originally sold at prices ranging from $1.43 to $2.00 per
share, (ii) 2,719,733 shares of no par value Class B nonvoting common stock
("Class B Common Stock"), including 2,058,803 shares issued upon conversion
of the Company's Series B convertible preferred stock ("Series B Preferred
Stock") originally sold at $3.00 per share, (iii) 103,500 shares of Series A
Preferred Stock, (iv) 77,349 shares of Series B Preferred Stock and (v)
warrants to purchase an aggregate of 799,000 shares of the Class A Common
Stock (the securities described in (i) through (v) above are referred to
collectively as the "Subject Securities") to persons who acquired the Subject
Securities from the Company between August 1996 and May 1998 (each,
individually referred to as an "Offeree" and all, collectively referred to as
the "Offerees"), in exchange for cash and services rendered at prices ranging
from $0.25 to $3.00 per share (the "Rescission Offer"). See "Rescission
Offer" and "Description of Capital Stock." The Company believes the issuance
or sale of the Subject Securities may have been in violation of certain
provisions of the Securities Act of 1933, as amended (the "Securities Act"),
and the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Accordingly, the Company may be liable to the Offerees in the aggregate
amount of $14,198,137, plus interest from the date of issuance, less, with
respect to shares of Series A Preferred Stock and Series B Preferred Stock
(collectively, the "Preferred Stock"), $248,128 in dividends paid to the
holders of such shares. The aggregate amount of accrued interest calculated
through October 31, 1999 is $2,455,149.39. The Company hereby offers to rescind
such prior sales by repurchasing the Subject Securities from the Offerees at
the price per share paid by the Offerees, plus an amount equal to the
interest thereon at the appropriate statutory rate per annum from the date of
issuance of the Subject Securities to the expiration of the Rescission Offer,
less any dividends paid, with respect to shares of Preferred Stock. The
applicable rates of interest for the repurchase of the Subject Securities
provided by law for residents of various jurisdictions are set forth under
"Rescission Offer." The Rescission Offer will expire on the later to occur of
(x) November , 1999 (30 days after the date of this Prospectus), or (y) 30
days after the date each Offeree receives this Prospectus, unless extended by
the Company in its sole discretion, but in no event shall the Rescission
Offer be extended beyond December 31, 1999 (the "Expiration Date"). The
Rescission Offer does not apply to any securities of the Company other than
the Subject Securities.
---------------------------------------------------------------------
All Offerees receiving the Rescission Offer are urged to read this
Rescission Offer carefully.
ALL OFFEREES WHO WISH TO HAVE THEIR SHARES REPURCHASED BY THE COMPANY SHOULD
COMPLETE THE RESCISSION ELECTION FORM ATTACHED HERETO AS EXHIBIT A BY
SELECTING OPTION A, ACCEPTANCE OF RESCISSION OFFER, AND RETURNING THE
RESCISSION ELECTION FORM TO THE COMPANY ACCORDING TO THE INSTRUCTIONS
DESCRIBED ON PAGES 2 AND 18 UNDER THE CAPTION "ACCEPTANCE OR REJECTION."
The date of this Prospectus is , 1999.
1
<PAGE>
No insider or affiliate of the Company holds any of the shares
subject to the Rescission Offer, except that BNB Enterprises, LLC d/b/a
Bull and Bear Enterprises, a company that is presently under the sole
management and ownership of Vincent W. Beale, Sr., holds 25,000 shares of the
Company's Series A Preferred Stock for which it paid $50,000 cash to the
Company in April 1997.
This Prospectus also relates to the resale of 2,200,000 shares of
Class B Common Stock underlying two warrants (the "Shaffner Warrants") issued
to Keith Shaffner in November 1997. Mr. Shaffner subsequently transferred
certain of the Shaffner Warrants to various individuals and entities
(collectively, the "Selling Shareholders"). The Company will receive gross
proceeds of $1.00 per share to the extent of cash exercises of the Shaffner
Warrants (a maximum amount of $2,200,000). See "Use of Proceeds" and "Plan of
Distribution and Selling Shareholders--Selling Shareholders."
This Prospectus also relates to the sale by the Company of up to
3,649,635 shares of Class A Common Stock at a price of $1.37 per share
($5,000,000 in the aggregate) to certain rescission underwriters pursuant to
the terms of underwriting agreements to provide $5,000,000 to fund the
Rescission Offer. See "Rescission Offer--Funding the Rescission Offer."
INVESTMENT IN THE SUBJECT SECURITIES IS SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION
OF MATERIAL RISKS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
THE SUBJECT SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
IN CONNECTION WITH THIS OFFERING OF CLASS A COMMON STOCK ISSUED TO THE
RESCISSION UNDERWRITERS AND CERTAIN SHARES OF CLASS B COMMON STOCK
SUBJECT TO WARRANTS, CERTAIN UNDERWRITERS AND SELLING SHAREHOLDERS MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON STOCK
AND THE CLASS B COMMON STOCK IN ACCORDANCE WITH RULE 103 OF REGULATION M.
SEE "PLAN OF DISTRIBUTION AND SELLING SHAREHOLDERS."
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATIONS
TO ANY SHAREHOLDERS AS TO WHETHER TO ACCEPT THE RESCISSION OFFER OR TO
RETAIN THE SUBJECT SECURITIES PURCHASED FROM THE COMPANY. EACH OFFEREE
MUST MAKE HIS OWN DECISION AS TO WHETHER TO ACCEPT THE RESCISSION OFFER.
ACCEPTANCE OR REJECTION
All Offerees are requested to complete the form of Election set
forth on EXHIBIT A attached hereto (the "Election") accompanying this
Prospectus and return it to the Company (Attention: Samuel C. Beale, Vice
President and General Counsel), 12777 Jones Road, Suite 400, Houston, Texas
77070 as soon as practicable, but in no event should the Election be
delivered to the Company later than the Expiration Date. The Election should
be completed to indicate whether the Offeree accepts or rejects the
Rescission Offer. Offerees accepting the Rescission Offer must enclose with
the Election the original certificates or other instruments representing the
Subject Securities, properly endorsed for transfer, with the signature(s)
guaranteed by an eligible guarantor institution (banks, stockbrokers, savings
and loan associations and credit unions with membership in an approved
signature guarantee medallion program). Any Offeree who has not delivered a
completed Election by the Expiration Date shall be conclusively deemed to
have rejected the Rescission Offer, except to the extent applicable state
laws provide otherwise. The Election and the stock certificates or other
instruments representing the Subject Securities may be delivered by hand or
courier service, or by mail. The method of delivery of all documents is at
the election and risk of the Offeree. If an Offeree desires to make use of
the mails to deliver a completed Election to the Company, delivery will be
deemed to have occurred on the date the Election
2
<PAGE>
is postmarked. Moreover, if using the mails, the Company recommends
registered mail or certified mail, return receipt requested, that is properly
insured.
EFFECT OF REJECTION
For purposes of applicable federal and state securities laws,
Offerees who reject the Rescission Offer will be deemed to hold registered
shares that are freely tradeable. Rejection of the Rescission Offer by
Offerees will not necessarily bar the Offerees from rescission or other
rights which they may have under federal or state securities laws if the
Company in fact violated such laws. However, federal law does provide that an
Offeree may, under certain circumstances, lose any rescission rights under
federal securities laws one year from the date of purchase of such shares. In
addition, most state securities laws provide that an Offeree may lose any
rescission rights by rejecting or failing to respond to a valid rescission
offer.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION, INCLUDING "RISK
FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS. SUCH
"FORWARD-LOOKING STATEMENTS" CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE"
OR "CONTINUE" OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. THOSE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS PROSPECTUS
AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF
THE COMPANY OR ITS DIRECTORS OR OFFICERS WITH RESPECT TO, AMONG OTHER THINGS:
(i) TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS;
AND (ii) THE COMPANY'S BUSINESS AND GROWTH STRATEGIES. FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED,
EXPRESSED OR IMPLIED, IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS. THE ACCOMPANYING INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING
WITHOUT LIMITATION, THE INFORMATION SET FORTH UNDER THE HEADINGS "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH
DIFFERENCES. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
ASSUMES THAT NO OFFEREE RECEIVING THE RESCISSION OFFER EXERCISES HIS RIGHT TO
RESCIND.
THE COMPANY
CyNet, Inc. (the "Company") is an Internet business solutions provider.
The Company's products and services are offered through MESSAGING which includes
fax, data, voice, e-mail and mobile messaging, and INTERNET SERVICES which
includes custom application development, e-commerce development, web content
creation, web hosting and Internet access.
The Company is a Texas corporation and was founded in 1995 to provide
fax services for business-to-business communication. The Company capitalized on
the dramatic increase in the usage of third-party fax services and created a
niche market for itself with its HYPERCAST fax broadcast desktop client software
and related services. In 1997, the Company introduced HYPERLINE, its
point-to-point desktop software and fax service in order to expand its fax
service.
In response to the rapid growth and popularity of e-mail and the
Internet as a primary communications medium, the Company set out to become a
full service Internet messaging provider. In 1998, the Company added to its
product offering HYPERWEB, its Internet-to-fax service; HYPERMAIL, its
fax-to-e-mail service; WEBCAST, its e-mail broadcast service; TELECAST, its
voice broadcast service; and HYPERCOMM, its teleconferencing service. To further
enhance its messaging services, the Company, through its subsidiary, Worldwide
Marketing Services, Inc., added enhancement services such as list procurement,
full-service graphic design and copy development services for its customers.
These additional services enabled the Company to provide its customers with
complete messaging solutions with "end-to-end" control of the solutions.
In July 1999, the Company began offering Internet-based services by
acquiring Cynet Interactive, LLC ("Cynet Interactive"), a wholly-owned
subsidiary of Cynet Holdings, LLC. The acquisition of Cynet Interactive allowed
the Company to expand its messaging and broadcast enhancement services to
include web site design, Internet application development for e-commerce and
other Internet-based applications, and web site hosting. Through a series of
projects, the Company has integrated its messaging services with Internet
applications, creating more effective solutions for its customers. The Company's
current Internet projects include the development of on-line shopping malls,
integrated procurement centers, live auctions and Internet web-based magazines
for customers. In July 1999, the Company entered into a strategic alliance with
IXC Communications, Inc. ("IXC Communications") to enable the Company to further
expand its products and services to include Internet access for business
customers. The Company expects this alliance with IXC Communications will enable
the Company to provide complete, "end-to-end" Internet business solutions just
as it is able to provide complete, "end-to-end" messaging business solutions.
The Company's solutions selling approach allows the Company to effectively
deliver its customers' messages irrespective of the transmission medium.
4
<PAGE>
The Company was incorporated in Texas on April 19, 1995. The Company's
principal executive offices are located at 12777 Jones Road, Suite 400, Houston,
Texas 77070 and the telephone number is (281) 897-8317. The Company's home page
is located at www.cynetinc.com. Information contained in the Company's web site
shall not be deemed a part of this Prospectus.
FINANCINGS
From the Company's inception through December 31, 1996, the Company
raised approximately $1.9 million of start-up capital by forming sixteen limited
liability companies ("LLCs") with various persons who received either a 40%
(nine LLCs) or 50% (seven LLCs) interest in operations in a city or group of
cities in exchange for cash capital contributions. The Company was the manager
of the LLCs and owned the other 50% to 60% profit interest. The funds received
from LLC members were used to develop the Company's network infrastructure.
Revenue and profits from all other cities not on the network were 100% owned by
the Company. From December 1997 through January 1998, the Company exchanged
2,421,580 shares of Class A Common Stock for the net equity interest ("Minority
Interest") of the members (other than the Company) in all of the LLCs, at an
exchange ratio of 1.2 shares of Class A Common Stock for each $1.00 of capital
originally contributed by a member to an LLC. As a result, the Company became
the owner of 100% of the equity interest in the LLCs. In 1998, the Company
dissolved each of the LLCs.
From August 1996 through December 31, 1997, the Company raised
approximately $15.3 million of additional capital through a series of private
offerings ("Offerings"), including $14,198,137 from the issuance or sale of the
Subject Securities. The proceeds from the Offerings were used principally to
develop and expand the Company's marketing and sales efforts, improve the
products and services, expand the communications network and for working
capital.
In July 1998, the Company entered into a Subscription Agreement (the
"Holdings Subscription Agreement") with Cynet Holdings, LLC ("Cynet Holdings"),
pursuant to which Cynet Holdings committed to purchase up to 10,000,000 shares
of Class A Common Stock for $1.00 per share. As of August 31, 1999, Cynet
Holdings had contributed $4,106,000 in cash to the Company, and the Company had
issued 4,106,000 shares of its Class A Common Stock to Cynet Holdings. In
addition, Cynet Holdings transferred all of the outstanding membership interests
of Cynet Interactive to the Company. See "Management -- Certain Transactions."
Since August 1999, Cynet Holdings has provided the Company additional
short-term financing of $277,000. These borrowings are unsecured, non-interest
bearing and are due on demand. See "Management -- Certain Transactions."
THE RESCISSION OFFER AND RESCISSION FINANCING
The Company is, subject to the terms and conditions of the Rescission
Offer, offering to rescind the issuance of the Subject Securities to the
Offerees. The Company has completed the Rescission Financing with the Rescission
Underwriters to fund the repurchase of the Subject Securities from Offerees who
accept the Rescission Offer. The following table sets forth information
regarding the Rescission Offer and the Rescission Financing:
<TABLE>
<CAPTION>
CLASS OF STOCK NUMBER OF SHARES SUBJECT TO RESCISSION
OUTSTANDING(1) OFFER
-------------- -----
<S> <C> <C>
Class A Common Stock(2)....................................... 27,214,707 5,514,491
Class B Common Stock.......................................... 3,119,762 2,719,733
Series A Preferred Stock...................................... 103,500 103,500
Series B Preferred Stock...................................... 87,349 77,349
Warrants to Purchase Class A Common Stock(3).................. 8,425,000 799,000
Warrants to Purchase Class B Common Stock..................... 2,550,954 -0-
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
No Proceeds from Rescission Offer............................. No proceeds will be received by the Company from
the Rescission Offer. However, the Company will
receive proceeds (i) to the extent of cash exercises
of the Shaffner Warrants to purchase Class B
Common Stock (see "Plan of Distribution" and
"Selling Shareholders") and (ii) from the Rescission
Financing (see "Use of Proceeds").
No Market..................................................... The holders of Subject Securities who reject the
Rescission Offer and the Rescission Underwriters
will own freely tradeable shares under the Securities
Act. No public market currently exists for any class
of the Subject Securities, and the Company provides
no assurance that there will be a market in the
future. See "Shares Eligible for Future Sale."
Risk Factors.................................................. An investment in the Company involves a high
degree of risk. See "Risk Factors."
</TABLE>
- -----------------
(1) Shares outstanding as of August 31, 1999, assuming 100% rejection of
the Rescission Offer and the successful completion of the Rescission
Financing.
(2) Includes 3,649,635 shares to be issued to the Rescission Underwriters,
but excludes 1,915,313 shares underlying options outstanding under the
Company's 1997 Restated Stock Option Plan.
(3) Includes a warrant to purchase 376,000 shares to be issued pursuant to
a consulting agreement between the Company and the Houston Economic
Opportunity Fund, L.P. ("HEOF") (see "Financing of Rescission
Liabilities" below) upon the completion of the Rescission Offer.
FINANCING OF RESCISSION LIABILITIES
The Company has entered into Underwriting Agreements (each, an
"Underwriting Agreement" and collectively, the "Underwriting Agreements") with a
group of underwriters (the "Rescission Underwriters") to provide $5,000,000 (the
"Rescission Financing") to fund the Rescission Offer. The Rescission
Underwriters include, among others, HEOF, a limited partnership whose general
partner is HEOF Management Corp., an affiliate of Enron Economic Development
Corporation, a wholly-owned subsidiary of Enron Corporation, a Houston,
Texas-based Fortune 500 energy company. Subject to the terms and conditions
of the Underwriting Agreements, the Company has agreed to sell and the
Rescission Underwriters have agreed to purchase an aggregate of 3,649,635
shares of Class A Common Stock at a price of $1.37 per share. The
Underwriting Agreements provide, among other things, that the obligation of
the Rescission Underwriters to purchase such shares of Class A Common stock
is subject to the successful completion of the Rescission Offer. For purposes
of this Prospectus, the Rescission Offer will be deemed successfully
completed if less than $5,000,000 is needed to fund the Rescission Offer.
As additional consideration for its participation in the Rescission
Financing, the Company has agreed to grant HEOF the right to require the Company
to repurchase the shares of Class A Common Stock issued to HEOF pursuant to its
Underwriting Agreement at a price of $1.51 per share (the "HEOF Put Option").
The HEOF Put Option will have a term of one year from the closing of the
Rescission Financing. In the event that the HEOF Put Option is exercised, the
Company's shareholder equity may be reduced by up to $2,420,000.
As of the date of this Prospectus, the funds comprising the Rescission
Financing have been deposited into an interest-bearing escrow account with First
Bank Texas, N.A. of Houston, Texas, and will be disbursed as needed to satisfy
the Company's rescission liability to Offerees who accept the Rescission Offer.
The proceeds from the Rescission Financing will be used to fund
$5,000,000 of the Rescission Offer. While the Company believes the Rescission
Financing will be sufficient to repurchase the Subject Securities from Offerees
6
<PAGE>
who accept the Rescission Offer, in the event that funds in excess of $5,000,000
are needed, the Company shall have the right, on or before the Expiration Date,
to either (i) with the consent of the Rescission Underwriters, secure additional
financing through the issuance of equity securities or the sale of assets in
amounts sufficient to satisfy the Company's rescission liabilities and complete
the Rescission Offer, or (ii) declare the entire Rescission Offer ineffective
and return all completed Elections, together with the certificates or other
instruments representing the Subject Securities, to the Offerees who accepted
the Rescission Offer. Any unused proceeds of the Rescission Financing remaining
after the funding of the Rescission Offer which are not returned to the
Rescission Underwriters will be used by the Company for general corporate
purposes. See "Risk Factors -- Lack of Sufficient Capital to Fund Rescission
Offer; Potential Rescission Liability" and "Use of Proceeds."
SUMMARY OF SELECTED FINANCIAL DATA
The following table presents summary historical data of the Company on
a consolidated basis (i) from the audited financial statements of the Company
for the years ended December 31, 1998 and 1997 and (ii) from the unaudited
financial statements of the Company for the six months ended June 30, 1999 and
June 30, 1998. The summary selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1998 1997 1999 1998
------ ------ ------ -----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 8,947,732 $ 4,960,355 $ 4,534,254 $ 4,243,585
Loss from operations.............................. (4,230,362) (7,958,870) (1,199,263) (1,837,574)
Net loss applicable to common shareholders........ (4,396,883) (8,502,067) (1,353,645) (1,862,439)
Net loss per common share......................... $ (0.19) $ (0.60) $ (0.05) $ (0.08)
Weighted average number of common shares
outstanding....................................... 23,109,154 14,086,177 25,015,773 22,441,445
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30
1998 1999
-------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit)(1)................................................. $ (885,068) $ 368,901
Total assets................................................................. 5,297,713 5,147,083
Stock and warrants subject to rescission..................................... 13,980,009 13,950,009
Capital deficit.............................................................. (12,218,072) (11,326,717)
</TABLE>
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(1) Includes $2,078,825 of deferred offering costs. See Note 3 of the
Notes to the Consolidated Financial Statements.
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RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. OFFEREES
AND OTHER PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.
HISTORY OF OPERATING LOSSES; ACCOUNTANTS' EXPLANATORY PARAGRAPH
The Company commenced business in April 1995 and has incurred operating
losses since inception. Revenue from the sale of messaging and Internet services
will be the Company's primary source of cash flow during 1999. Although the
Company continues to obtain significant numbers of new accounts and revenue
continues to increase, there can be no assurance that the Company will be able
to generate sales in quantities sufficient to generate positive cash flow. In
addition, there can be no assurance that the Company will not continue to
experience operating losses for the foreseeable future as it commits additional
resources to increase revenue.
The Company's independent certified public accountants included an
explanatory paragraph in their opinion with respect to the Company's financial
statements to reflect that recurring losses from operations and the Rescission
Offer have raised substantial doubt about the ability of the Company to continue
as a going concern. Furthermore, the financial statements do not include any
adjustments that might result from the outcome of such uncertainty. The
Company's internally generated cash flows from operations have historically
been, and continue to be, insufficient for cash needs. The Company has,
therefore, relied upon external equity financing to continue its operations.
From inception through June 30, 1999, the Company incurred significant
operating losses and at June 30, 1999, the Company had a capital deficit of
$11,326,717. Until the Company can obtain monthly sales levels of approximately
$1,200,000, which the Company currently expects to be necessary to fund current
working capital needs, there is uncertainty as to the ability of the Company to
expand its business and continue as a going concern. The Company's current cash
forecast indicates that there will be negative cash flows from operations into
the fourth quarter of 1999, at which time the Company's operating revenues are
expected to be sufficient to cover operating costs and provide positive cash
flow. There can be no assurance that the Company will be able to generate
revenues as projected sufficient to service the cost of operations and fund the
capacity to handle the Company's growth. Further, failure to realize the sales
growth projections could shorten the period that the current cash balance will
be sufficient to meet working capital needs. As a result, there can be no
assurance that the Company will be successful in funding its working capital and
capacity needs.
POTENTIAL RESCISSION LIABILITY; LACK OF SUFFICIENT CAPITAL TO FUND RESCISSION
OFFER
The Rescission Offer is being made to all persons who acquired
the Subject Securities from the Company. If all of the Offerees holding the
Subject Securities accept the Rescission Offer, the Company will be required
to make payments aggregating $14,198,137 plus the aggregate amount of
interest at the statutory interest rates from the date of issuance to the
Expiration Date less $248,128 in dividends paid on the Preferred Stock. As of
October 31, 1999, the aggregate accrued interest (on the total liability of
$14,198,137) will be $2,455,149.39 and will continue to accrue, assuming the
full liability is incurred, at the rate of approximately $3,500 per day. The
Company has executed Underwriting Agreements with the Rescission Underwriters
to provide $5,000,000 to the Company for the Rescission Financing. In the
event that funds in excess of $5,000,000 are needed to fund the Company's
rescission liability, the Company will be required, with the consent of the
Rescission Underwriters, to seek additional capital through equity financing
or the sale of assets, and there can be no assurance that sufficient
financing can be obtained on terms acceptable to the Company or that the
Rescission Underwriters will consent to the Company obtaining such additional
financing or completing the Rescission Offer. In addition, the Company shall
also have the right (but not the obligation) to declare the entire Rescission
Offer ineffective. See "Rescission Offer -- Funding the Rescission Offer." If
the Company is unable to obtain additional financing to complete the Rescission
Offer or declares the entire Rescission Offer ineffective, the Company will
continue to be subject to claims from the Offerees holding the Subject
Securities for possible violations of applicable state and federal securities
laws. Any unused proceeds of the Rescission Financing remaining after the
funding of the Rescission Offer which are not returned to the Rescission
Underwriters will be used by the Company for general corporate purposes. See
"Use of Proceeds."
There can be no assurance that claims asserting violations of state or
federal securities laws will not be asserted notwithstanding the Rescission
Offer. Furthermore, there can be no assurance that the Company will not be
subject to penalties or fines relating to past securities issuances or that the
Offerees or other holders of the Subject Securities will not assert or prevail
in claims against the Company for rescission or damages under federal or state
securities laws. The staff of the Securities and Exchange Commission (the
"Commission") takes the position that a person's right of rescission under
federal securities law may, under certain circumstances, survive a rescission
offer. Even if the Company were successful in defending any securities law
claims, the assertion of such claims against the Company would result in costly
litigation and significant diversions of effort by the Company's management. In
addition, the Rescission Offer will not prevent the Commission or any state
securities commission from pursuing enforcement action against the Company with
respect to any alleged violations of federal or state securities laws. The
occurrence of any of the foregoing could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Rescission Offer -- Effect of Rescission Offer" and Note 8 of the Notes to
Consolidated Financial Statements.
NEED FOR ADDITIONAL CAPITAL AND CAPITAL REQUIREMENTS
The Company's efforts to develop and introduce its messaging and
Internet services have required, and will continue to require, the Company to
invest in infrastructure and systems development. In addition, the Company
has incurred substantial losses since inception and expects to continue to
incur losses through at least the third quarter of 1999. During the fourth
quarter of 1999, the Company expects its operating revenues will be
sufficient to cover operating costs and provide positive cash flow. However,
there can be no assurance that the Company will meet these expectations and
generate positive cash flow in the foreseeable future. As a result, the
Company expects it will need to raise additional capital in future periods.
The Company currently does not have sufficient capital to meet its cash flow
requirements over the next 12 months. The Company expects to satisfy its cash
flow shortages with (i) the sale of additional shares of Class A Common Stock
to Cynet Holdings pursuant to the Holdings Subscription Agreement, (ii) the
proceeds of the Rescission Financing if the aggregate amount required to fund
the Rescission Offer is less than $5,000,000 and (iii) the proceeds of a
working capital line of credit which the Company is presently seeking
with an unaffiliated lender. If the Company experiences greater than
anticipated capital requirements, or if the implementation of the Company's
operating strategy fails to produce anticipated revenue growth and cash flows
or if additional working capital is required for any other reason, the
Company will be required to obtain additional sources of capital earlier than
currently anticipated. The timing of the need for additional capital also
will be affected by the extent to which the Rescission Offer is accepted. See
"Rescission Offer" and "--Lack of Sufficient Capital to Fund
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Rescission Offer; Potential Rescission Liability." There can be no assurance
that the Company will be able to obtain equity or lease financing when needed or
on terms that the Company finds acceptable. Any additional equity financing may
cause immediate and substantial dilution to the Company's shareholders. If the
Company is unable to obtain sufficient funds to satisfy its capital
requirements, it will be forced to reduce the scope of its expansion plans,
curtail operations, dispose of assets or seek extended payment terms from its
vendors, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
INFORMAL COMMISSION INQUIRY
In May 1997, the Company received a letter from the enforcement
division of the Commission in which the Company was advised of an informal
inquiry being conducted with respect to the Offerings. The Company met with
the Commission in August 1997 in an attempt to resolve the concerns regarding
potential violations of securities laws raised in the informal inquiry, and
believes that it has complied with all information requests from the
Commission. Management believes the Rescission Offer addresses substantially
all of the concerns raised by the Commission in its inquiry. While there can
be no assurance that such concerns or other issues will not be raised or that
the Rescission Offer will completely satisfy the Commission's concerns, the
Company has been advised orally that upon the completion of the Rescission
Offer, the Commission currently intends to close its inquiry.
RISK OF MANAGING GROWTH; RECENT MANAGEMENT CHANGES
The Company's growth has placed, and is expected to continue to place,
a significant strain on the Company's management, administrative, operational,
financial and technical resources and on its systems and controls. The Company
has made recent changes in executive level management positions and certain of
the Company's senior management personnel have worked together only a short
time. The Company believes it will need, both in the short term and the long
term, to hire additional qualified administrative and management personnel in
all functional areas. Failure to locate, hire and retain such qualified
personnel or failure to manage the Company's growth properly could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "-- Dependence on Key Personnel; Need to Hire
Additional Qualified Personnel," "Business," "Management's Discussion and
Analysis of Financial Condition and Results of Operation,"and "Management."
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MARKET GROWTH OF MESSAGING AND INTERNET SERVICES
The market and demand for business-to-business messaging services and
Internet application services is growing rapidly. While the Company believes the
market and demand for such services will continue to grow, there can be no
assurance as to the extent of any such growth. Even if there is continued growth
in the use of messaging and Internet services, there can be no assurance that
customers will elect to use service providers, such as the Company, to fulfill
their messaging and Internet application services needs. If the use of service
providers does continue to grow, there can be no assurance that the Company will
be able to attract these new users as customers. See "Business--Competition."
COMPETITION
The Company faces a high degree of competition in each of its service
areas. The Company's current and potential competitors fall into the following
categories: (i) telecommunications companies and resellers, (ii) Internet
service providers, (iii) enhanced fax service providers, (iv) unified Internet
messaging providers and (v) various web design and electronic commerce
providers. The Company is unaware of any other entity that combines Messaging
and Internet products and services in a unified service offering as does the
Company. However, because of the high rate at which other established and new
companies are entering the various business segments, there can be no assurance
that additional competitors will not enter markets the Company currently serves.
Many of these competitors may possess significantly greater financial,
marketing, technical and other resources than the Company. There can be no
assurance that additional competitors will not enter markets that the Company
presently serves or plans to serve or that the Company will be able to compete
effectively. In addition, there can be no assurance that potential customers
will not elect to use their own equipment to fulfill their needs for messaging
and Internet services or that they will not elect to use alternatives to the
Company's messaging and Internet services. See "Business -- Competition."
COMPANY SYSTEM FAILURE
The success of the Company is largely dependent upon the efficient and
uninterrupted operation of its telecommunications system infrastructure. Within
120 days from the date of this Prospectus, the Company will expand its disaster
recovery plan to include one or more redundant network switching centers. The
Company's systems and operations remain vulnerable to damage or interruption
from fire, earthquake or other natural disaster and from power loss,
telecommunications failure, break-ins, unauthorized entry, computer viruses, and
similar events beyond the Company's control. Furthermore, the hardware, software
and network systems developed by the Company are relatively new, and therefore
have not withstood the demands of the larger volume associated with the
Company's revenue projections. There can be no assurance that these systems will
be adequate to operate at the volume levels projected or operate efficiently
enough to produce the required gross margin for the Company to be profitable.
The occurrence of any of the foregoing risks could have a material adverse
effect on the Company's business, financial condition and results of operations.
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LONG DISTANCE CARRIERS
The foundation of the Company's telephony network infrastructure
depends on the Company's right to use the telecommunications lines of certain of
the long distance carriers. There can be no assurance that these companies will
not discontinue or otherwise alter their relationships with the Company in a
manner that would have a material adverse effect on the Company's business,
financial condition and results of operations.
LACK OF LONG-TERM CUSTOMER CONTRACTS
The majority of the Company's services are performed pursuant to
specific purchase orders from customers and other short-term arrangements. While
the Company actively pursues longer term contracts with customers, the Company's
existing contracts typically are of a duration of six months to one year. As a
result, there can be no assurance that the majority of the Company's customers
will continue to purchase the Company's services in the future.
See "Business -- Customers."
THE PRICING FOR SERVICES IS UNCERTAIN
Prices for messaging and Internet services have fallen historically.
The Company expects prices in the messaging and Internet industry in general to
continue to fall, and prices for the Company's existing and future services may
fall correspondingly. Accordingly, there can be no assurance that the Company's
current pricing schedule will prove to be viable, demand for Company services
will materialize at the prices it would like to charge, or the Company will be
able to sustain adequate future pricing levels as competitors introduce
competing services.
DEPENDENCE ON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company is highly dependent on the technical and management skills
of its key employees, including technical, sales, marketing, financial and
executive personnel, and on its ability to identify, hire and retain additional
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to retain existing personnel or identify
or hire additional personnel. The failure to retain and attract the necessary
technical, managerial, financial, marketing and customer service personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's performance also depends on its ability
to retain and motivate its executive officers and key employees, several of whom
have worked together for only a short time. The Company has entered into
employment agreements with five of its senior officers. The loss of key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Risk of Managing Growth;
Recent Management Changes and New Information Systems" and "Management --
Directors and Officers" and "Management -- Employment Agreements."
TECHNOLOGICAL CHANGE
The messaging and Internet services industries are characterized by
rapid and continuous technological change, evolving industry standards, emerging
competition and frequent new service and other product introductions. Future
technological advances in the messaging and Internet services industries may
result in the availability of new services that could compete with the services
currently provided by the Company or decreases in the cost of existing services
that could enable the Company's established or potential customers to fulfill
their own messaging and Internet services needs more cost effectively. There can
be no assurance that the Company can successfully identify new service
opportunities and develop and bring new products and services to market in a
timely and cost-effective manner, or that products, services or technologies
developed by others will not render the Company's products, services or
technologies noncompetitive or obsolete.
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SOFTWARE AND HARDWARE DEFECTS; POSSIBILITY OF DEVELOPMENT DELAYS
Software-based services and equipment, such as the Company's, may
contain undetected errors or failures when introduced or when new versions are
released. The hardware, software, and network systems the Company has developed
are relatively new and, therefore, have not withstood the demands of the larger
volume associated with its revenue projections. There can be no assurance that
these systems will be adequate to operate at the volume levels projected or
operate efficiently enough to produce the required gross margin the Company
needs to be profitable. Furthermore, there can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not
be found in the Company's software after commercial release, or that the Company
will not experience development delays, resulting in delays in market
acceptance. Any of these circumstances could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
ABILITY TO OBTAIN TELEPHONE NUMBERS
The Company's future success will depend on its ability to procure
large quantities of telephone numbers in the United States and foreign
countries, including telephone numbers in area codes that its customers demand.
The Company's ability to procure telephone numbers depends on applicable
regulations, the practices of telecommunications carriers that provide telephone
numbers and the level of demand for new telephone numbers. Failure to obtain
these numbers in a timely and cost-effective manner may prevent the Company from
entering some foreign markets or hamper the Company's growth in domestic
markets, and may have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
THE INTERNET AS AN INFORMATION TRANSMISSION MEDIUM
The Company's future success will depend on its ability to route its
customers' traffic through the Internet and through dedicated and/or partially
dedicated data network bandwidth. The Company depends on the viability of the
Internet and other bandwidth as a medium for the transmission of information in
various forms. To date, the Company has transmitted a limited amount of customer
traffic as compared to its growth projections. There can be no assurance that
these will prove to be viable communications media or that information
transmission will be reliable. There also can be no assurance against the
development of capacity constraints that might inhibit efficient information
transmission.
CONTINUED GROWTH IN THE USE OF THE INTERNET
The Company's future success is dependent upon continued growth in the
use of the Internet in order to support the sale and use of the Company's
services and products. There can be no assurance that the number of Internet
users will continue to grow. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced products
and services are subject to a high level of uncertainty. The Internet may not
prove to be a viable avenue to transmit communications for a number of reasons.
These reasons include (i) lack of acceptable security technologies, (ii) lack of
access and ease of use, (iii) traffic congestion, (iv) inconsistent quality or
speed of service, (v) potentially inadequate development of the necessary
infrastructure, (vi) excessive governmental regulation, (vii) uncertainty
regarding intellectual property ownership, or (viii) lack of timely development
and commercialization of performance improvements, including high-speed modems.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's current international operations consist of providing
messaging and Internet services to locations outside the United States. The
Company is planning to increase service offerings to foreign locations and
provide services for foreign customers in the near future. The Company is also
considering opportunities for acquiring businesses with significant
international operations and customers. However, any international expansion
will subject the Company to the wide range of general business risks associated
with international operations, including (i)
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unexpected changes in legal and regulatory requirements, (ii) changes in
tariffs, exchange rates and other barriers, (iii) political and economic
instability, (iv) inability to repatriate net income from foreign markets, (v)
long accounts receivable payment cycles in certain countries, (vi) potentially
adverse tax consequences and (vii) the regulation of Internet access providers
by foreign regulatory authorities. There can be no assurance that such factors
will not have a material adverse effect on the Company's future operations and,
consequently, on the Company's business, financial condition and results of
operations.
LACK OF PATENTS AND COPYRIGHTS
The Company has developed much of its own operating system and user
software and expects to continue to improve existing applications and develop
new applications in the future. As of the date of this Prospectus, the Company
has not copyrighted or patented any of its software and relies on non-disclosure
agreements and common law rights of protection. Other companies may hold or
obtain patents on inventions or may otherwise claim proprietary rights to
technology useful or necessary to the Company's business. The Company intends to
pursue available patent, copyright, trademark and service mark protection for
its business processes, software, and Internet content. The extent to which the
Company may be required to seek licenses under such patents or other proprietary
rights of third parties, and the cost or availability of such licenses, cannot
now be predicted. The Company relies to a significant extent on proprietary
know-how, particularly with respect to messaging processes. There can be no
assurance, however, that others will not independently develop superior know-how
or obtain access to know-how used by the Company that the Company now considers
proprietary. See "Business -- Intellectual Property."
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
The Company intends, in the future, to pursue opportunities to acquire
customer bases and businesses from, make investments in, or enter into strategic
alliances with, companies that have customer bases, switching capabilities or
existing networks in the Company's current or target markets. See "Business --
Strategic Relationships." The Company currently does not have any acquisitions
or negotiations pending. Any future acquisitions, investments or strategic
alliances will be financed with either equity or debt securities of the Company,
and will be accompanied by the risks commonly encountered in such transactions
or efforts. Such risks include, among others, (i) the difficulty of identifying
appropriate acquisition candidates, (ii) the difficulty of assimilating the
operations and personnel of the respective entities, (iii) the potential
disruption of the Company's ongoing business, (iv) the inability of management
to capitalize on the opportunities presented by acquisitions, investments,
strategic alliances or related efforts, (v) the failure to successfully
incorporate licensed or acquired technology and rights into the Company's
services, (vi) the inability to maintain uniform standards, controls, procedures
and policies and (vii) the impairment of relationships with employees and
customers as a result of changes in management. Acquired operations typically
operate independent marketing, customer support, billing systems and other
functions. Any acquisition by the Company could result in difficulties in the
integration and consolidation of customer bases or operations. Pending such
integration and consolidation, it would be necessary for the Company to maintain
separate billing systems and other functions of the acquired operation, which
could cause inefficiencies and significant operational complexity and expense,
increase the risk of billing delays and financial reporting difficulties, and
impair the Company's efforts to cross-sell the products and services of the
acquired operation. Additionally, in connection with an acquisition, the Company
could experience rates of customer attrition that would be significantly higher
than the rate of customer attrition that it ordinarily experiences. Further, to
the extent that any such transaction involves customer bases or businesses
located outside the United States, the transaction would involve the risks
associated with international operations. There can be no assurance that the
Company would be successful in overcoming these risks or any other problems
encountered with such acquisitions, investments, strategic alliances or related
efforts. In addition, no assurance can be given that the Company would be able
to obtain the capital it will need to finance any such efforts. See "-- Risks
Associated with International Operations."
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GOVERNMENTAL REGULATION
The telecommunications industry is subject to regulation by the Federal
Communications Commission (the "FCC"), by various state public service and
public utility commissions and by various international regulatory authorities.
The FCC has the power to impose regulatory requirements on the Company and
currently classifies the Company as a "nondominant carrier." Generally, the FCC
has chosen not to closely regulate the charges or practices of nondominant
carriers. The FCC also has the power to impose more stringent regulatory
requirements on the Company and to change its regulatory classification. As a
result, there can be no assurance that the FCC will not change the Company's
regulatory classification or otherwise subject the Company to more burdensome
regulatory requirements that would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is subject to federal and state laws regulating the
unsolicited transmission of fax and e-mail transmissions for advertisement
purposes. The Company has adopted a policy to refrain from transmitting fax and
e-mail advertisements except to the Company's own customers and other recipients
who have expressed an interest in receiving the transmitted information or
otherwise have given their permission to receive such transmissions. The Company
encourages its customers to familiarize themselves with the relevant laws and to
conduct their businesses in accordance with applicable laws.
In connection with its anticipated international operations, the
Company will be required to satisfy a variety of foreign regulatory
requirements. The Company intends to explore and to seek to comply with these
requirements on a country-by-country basis. There can be no assurance that the
Company will be able to satisfy the regulatory requirements in foreign
countries, and the failure to satisfy such requirements may prevent the Company
from operating in such countries. The failure to comply with foreign regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
LACK OF PUBLIC MARKET
There has been no public trading market for the Company's Class A and
Class B Common Stock and there can be no assurance that one will develop.
Management will attempt to develop a public market in the Class A and Class B
Common Stock immediately after the closing of the Rescission Offer by means of
the OTC Bulletin Board Service ("OTCBB") by engaging market makers in the shares
in such a manner that will permit trading. Assuming the successful completion of
the Rescission Offer and the Rescission Financing, the Company intends to take
the necessary actions to allow its Class A Common Stock to be traded by means of
the Nasdaq National Market System ("NMS"). However, there can be no assurance
that a market for the Company's Class A or Class B Common Stock will ever
develop on the OTCBB or the NMS. If any market is developed it should be assumed
that such market will be highly illiquid, sporadic and volatile.
PENNY STOCK REGULATION
The Commission has adopted rules that regulate broker-dealer practices
in connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NMS,
provided that current price and volume information with respect to transactions
in such securities is provided by the exchange system). The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document
prepared by the Commission that provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer also must
provide the customer with bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from such rules, the
broker-dealer must make a special written determination that a penny stock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of
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reducing the level of trading activity in any secondary market for a stock that
becomes subject to the penny stock rules. The Company's Class A and Class B
Common Stock may be subject to the penny stock rules, and accordingly, investors
rejecting this Rescission Offer may find it difficult to sell their shares, if
at all.
CONTINUED CONTROL BY CERTAIN SHAREHOLDERS
Assuming 100% rejection of the Rescission Offer, Cynet Holdings will
own approximately 50.0% of the Company's Class A Common Stock. As a result,
it will be able to exercise significant influence on the business and affairs
of the Company, including election of the Company's directors and the
authorization of other corporate actions requiring shareholder approval. See
"Principal Shareholders."
AUTHORIZED STOCK
The Board of Directors of the Company has the authority to issue up
to 10,000,000 shares of "blank check" preferred stock with such designations,
rights and preferences as may be determined by the Board of Directors.
Accordingly, the Board of Directors of the Company is empowered, without
further shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect
the voting power or other rights of the holders of the Company's Common
Stock. Certain companies have used the issuance of preferred stock as an
anti-takeover device and the Board of Directors could, without further
shareholder approval, issue preferred stock with certain rights that could
discourage an attempt to obtain control of the Company in a transaction not
approved by the Board of Directors. The Board of Directors of the Company
also has authority to issue up to 60,000,000 shares of Common Stock, of which
40,000,000 shares have been designated as Class A Common Stock and 20,000,000
shares have been designated as Class B Common Stock. See "Description of
Capital Stock." Assuming the successful completion of the Rescission Offer
and the Rescission Financing, the Company intends to (i) offer the holders of
the Class B Common Stock the right to exchange their shares of Class B Common
Stock for an equal number of shares of Class A Common Stock and (ii) increase
the number of authorized shares of its Common Stock to 100 million shares at
a special meeting of the Company's shareholders. See "Description of Capital
Stock."
FLUCTUATION IN STOCK PRICE
The Company's annual and quarterly operating results may fluctuate
significantly in the future as a result of numerous factors, including (i) the
rate at which the Company is able to add customers and up-sell additional usage-
based services to existing customers, (ii) the amount and timing of expenditures
to enhance sales and marketing and to expand the Company's infrastructure, or
other costs, as it expands its network, (iii) the announcement or introduction
of new or enhanced services by the Company's competitors, (iv) technical
difficulties or network downtime, and (v) economic and competitive conditions
specific to the Internet and messaging industries. As a result, it is likely
that in some future periods the Company's operating results will be below the
expectations of securities analysts and investors. If this happens, the trading
price of the Company's Common Stock would likely be materially adversely
affected.
DETERMINATION OF PRICE OF OFFERINGS
The offering prices and assigned values relating to the issuances of
the Subject Securities and the Rescission Financing were arbitrarily determined
by the Company and bore no relationship to the Company's earnings, assets, book
value or any other generally accepted criteria of value. There can be no
assurance that if an Offeree rejects the Rescission Offer he will be able to
sell in the future, if at all, the Subject Securities for a price higher than
the original offering price.
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NEED TO MAINTAIN A CURRENT PROSPECTUS
The Company must maintain a current prospectus in order for the Selling
Shareholders to sell the shares of the Class B Common Stock to which this
Prospectus relates. In the event that the Company is unable to maintain a
current prospectus due to lack of sufficient financial resources or for other
reasons, the Selling Shareholders may be unable to resell their shares of the
Class B Common Stock in any public market.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This Prospectus contains forward-looking statements, including
statements regarding, among other items, the Company's future plans and growth
strategies and anticipated trends in the industry in which the Company operates.
These forward-looking statements are based on the Company's expectations and are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements as a result of the factors described herein,
including, among others, regulatory or economic influences. In light of these
risks and uncertainties, there can be no assurance that the objectives and plans
of the Company will be achieved.
YEAR 2000 RISK
The Company reviewed for Year 2000 compliance the computer hardware and
software systems used in the delivery and support of its products and services
and brought all systems into compliance and readiness. However, the ability of
third parties with whom the Company transacts business to adequately address
their Year 2000 issues is outside the Company's control. Therefore, there can be
no assurance that the failure of such third parties to adequately address their
respective Year 2000 issues will not have an adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
RESCISSION OFFER
BACKGROUND
From August 1996 through May 1998, the Company raised $14,198,137 of
capital through the issuance or sale of the Subject Securities. The following
table sets forth information regarding (i) the states in which the Offerees
reside, (ii) the statutory interest rates applicable in such states, (iii) the
aggregate amount of Subject Securities issued by the Company, (iv) the aggregate
amount of accrued interest calculated through October 31, 1999, (v) the amount
of dividends paid on Preferred Stock and (vi) the aggregate amount of liability
calculated through October 31, 1999.
<TABLE>
<CAPTION>
AMOUNT DIVIDENDS
STATUTORY SUBJECT TO ACCRUED PAID ON AGGREGATE
STATE OR TERRITORY RATE RESCISSION INTEREST PREFERRED STOCK LIABILITY
<S> <C> <C> <C> <C> <C>
Arizona 10% $669,899.00 $156,276.06 $2,381.04 $823,794.02
Arkansas 6% $30,000.00 $3,610.00 $0.00 $33,610.00
California 7% $1,212,451.00 $217,458.61 16,929.71 $1,412,979.90
Colorado 8% $152,000.00 $21,592.75 $1,320.98 $172,271.77
Connecticut 6% $8,000.00 $1,383.51 $0.00 $9,383.51
District of Columbia 6% $16,600.00 $2,498.90 $318.00 $18,780.90
Florida 10% $201,500.00 $51,107.40 $2,774.78 $249,832.62
Georgia 6% $17,001.00 $2,740.62 $382.19 $19,359.43
</TABLE>
16
<PAGE>
<TABLE>
AMOUNT DIVIDENDS
STATUTORY SUBJECT TO ACCRUED PAID ON AGGREGATE
STATE OR TERRITORY RATE RESCISSION INTEREST PREFERRED STOCK LIABILITY
<S> <C> <C> <C> <C> <C>
Hawaii 10% $13,000.00 $3,719.93 $263.01 $16,456.92
Illinois 10% $153,000.00 $40,834.14 $1,837.81 $191,996.33
Indiana 8% $1,332,962.00 $282,916.77 $16,365.08 $1,599,513.69
Idaho 6% $40,000.00 $6,889.77 $0.00 $46,889.77
Iowa (1) (1$60,000.00 $11,151.00 $263.01 $70,887.99
Kansas 15% $22,500.00 $8,967.18 $793.42 $30,673.76
Kentucky 6%(2) $50,000.00 $9,521.19 $0.00 $59,521.19
Louisiana (3) ($36,500.00 $7,028.27 $0.00 $43,528.27
Maryland 10% $480,450.00 $102,183.48 $6,703.40 $575,930.08
Massachusetts 6% $76,250.00 $12,013.38 $2,061.79 $86,201.59
Maine 8% $2,000.00 $429.44 $86.79 $2,342.65
Michigan 6% $2,808,042.00 $448,129.82 $84,063.17 $3,172,108.65
Minnesota 6% $446,060.00 $66,209.56 $9,465.98 $502,803.58
Mississippi 6% $51,000.00 $7,748.00 $608.19 $58,139.81
Missouri 8% $35,000.00 $6,147.40 $0.00 $41,147.40
Nevada (4) $76,000.00 $3,824.66 $104.94 $79,719.72
New Hampshire 10% $5,000.00 $1,328.01 $143.67 $6,184.34
New Jersey 5.5% $26,000.00 $3,798.72 $723.29 $29,075.43
New York 9% $146,667.00 $36,062.25 $7,339.56 $175,389.69
North Carolina 8% $27,500.00 $6,800.85 $258.90 $34,041.95
Ohio (5) $85,002.00 $0.00 $3,853.18 $81,148.82
Oklahoma 10% $7,500.00 $1,834.56 $26.71 $9,307.85
Oregon 9% $6,000.00 $1,474.50 $238.68 $7,235.82
Pennsylvania 6% $79,200.00 $13,356.68 $764.96 $91,791.72
South Carolina 6% $43,000.00 $6,455.70 $452.06 $49,003.64
Tennessee 10% $809,988.00 $214,483.77 $18,577.48 $1,005,894.29
Texas 6% $4,398,425.00 $643,788.91 $64,330.41 $4,977,883.50
Utah 12% $30,000.00 $8,700.00 $0.00 $38,700.00
Vermont 12% $30,000.00 $9,420.00 $608.22 $38,811.78
Virginia 6% $46,401.00 $7,330.09 $1,461.33 $52,269.76
Washington 8% $3,000.00 $492.45 $0.00 $3,492.45
Wisconsin 5% $201,239.00 $25,441.01 $1,837.28 $224,842.73
Canada (6) $30,000.00 $0.00 $0.00 $30,000.00
England (6) $33,000.00 $0.00 $0.00 $33,000.00
France (6) $100,000.00 $0.00 $0.00 $100,000.00
Saudi Arabia (6) $10,000.00 $0.00 $0.00 $10,000.00
Taiwan (6) $90,000.00 $0.00 $789.04 $89,210.96
------------- ------ -------------- ------------- ----------- --------------
Total $14,198,137.00 $2,455,149.34 $248,128.06 $16,405,158.28
</TABLE>
(1) Set monthly at the 52-week Treasury Bill rate plus 2%. As of August
31,1999, the rate was 6%.
(2) Effective 7/15/98, the statutory rate for rescission offers is equal to
the "legal rate," which is currently 12%.
(3) In 1996 the rate was 9.75%, from 1/97 through 7/97 the rate was 9.25%,
from 8/97 through 12/97 the rate was 7.9% and for 1998 the rate is 7.3%.
(4) From 1/97 through 6/97 the rate was 8.25%, from 7/97 to the date of this
Prospectus the rate was 8.5%.
(5) The applicable statute does not require the payment of interest in an
offer of rescission.
(6) No applicable statute; interest will be paid at 6%.
17
<PAGE>
The Subject Securities were not registered under the federal and state
securities laws, but were issued in reliance upon the exemptions from
registration afforded by (i) Sections 3(b) and 4(2) of the Act and Regulation D
promulgated thereunder and (ii) various state limited offering exemptions,
respectively. However, the Company believes that:
(1) Under the "integration" provisions of Regulation D, the
Offerings may be viewed as one continuous "public" offering
which was not in compliance with Regulation D;
(2) Because of the frequency and number of sales of the Subject
Securities, including the number of persons who received
offers and who purchased the Company's securities, the
issuances may not have been eligible for the exemptions from
registration pursuant to Section 4(2) of the Securities Act as
transactions by an issuer not involving any public offering;
(3) Certain of the Subject Securities may have been issued to
persons who failed to receive adequate information regarding
the Company and its financial condition, including information
regarding the Company's potential liability for possible
violations of federal and state securities laws; and
(4) The Subject Securities may have been issued in violation of
state securities laws as well as the securities laws of
Canada, England, France, Saudi Arabia and Taiwan.
The failure to provide adequate disclosure to purchasers of the Subject
Securities may result in potential liabilities under the Exchange Act and the
regulations thereunder.
If the Offerings were not conducted in compliance with applicable
securities laws, the Company may have incurred a liability to the holders of the
Subject Securities of $14,198,137 plus interest from the date of issuance less,
with respect to shares of Preferred Stock, $248,128 in dividends paid to the
holders of such shares. See "Risk Factors -- Lack of Sufficient Capital to Fund
Rescission Offer; Potential Rescission Liability" and Note 8 of the Notes to the
Consolidated Financial Statements.
The Company has elected to offer to all of the Offerees the right to
rescind their acquisitions of the Subject Securities and to receive in exchange
therefor, a payment in an amount equal to the aggregate consideration paid for
the issuance of the Subject Securities, plus interest at the applicable
statutory rate in the state in which they reside (the "Statutory Rate") from the
date of issuance, less, with respect to shares of Preferred Stock, dividends
paid, or, if the Subject Securities have been disposed of at a loss, the
difference between the purchase price of such Subject Securities and the price
received upon disposition plus interest at the Statutory Rate from the date of
disposition, less dividends paid.
The Rescission Offer is being made in order to limit, so far as may
be permitted under applicable federal and state securities laws, the
potential liability of the Company with respect to the issuances of the
Subject Securities. The Rescission Offer is not an admission that the Company
did not comply with the registration provisions of applicable federal and
state laws nor is it a waiver of any applicable statutes of limitations.
Notwithstanding the Rescission Offer, there can be no assurance that the
Company will not be subject to penalties or fines relating to past securities
issuances or that other holders of the Company's securities will not assert
or prevail in claims against the Company for rescission or damages under
state or federal securities laws. See "Risk Factors -- Lack of Sufficient
Capital to Fund Rescission Offer; Potential Rescission Liability" and Note 8
of the Notes to the Consolidated Financial Statements.
ACCEPTANCE OR REJECTION
Any Offeree may accept or reject the Rescission Offer, in whole but
not in part, by completing the pertinent part of, and signing, the Election
accompanying this Prospectus (a form of which is attached hereto as EXHIBIT
A) and returning it to the Company (Attention: Samuel C. Beale, Vice
President and General Counsel), 12777 Jones Road, Suite 400, Houston, Texas
77070 as soon as practicable, but in no event should it be delivered to the
Company later than the Expiration Date. The Election should be completed to
indicate whether the Offeree accepts or rejects the Rescission Offer. Any
Offeree accepting the Rescission Offer must enclose with the Election the
original certificates or other instruments representing the Subject
Securities, properly endorsed for transfer, with the signature(s) guaranteed
by an eligible guarantor institution (banks, stockbrokers, savings and loan
associations and credit unions with membership in an approved signature
guarantee medallion program). All acceptances of the Rescission Offer will be
deemed to be effective on the Expiration Date and, unless the offer is
accepted on or before such date, the right to accept the Rescission Offer
shall terminate. Nevertheless, in the event the aggregate amount necessary to
fund the Rescission Offer exceeds $5,000,000, the Company shall have the
right (but not the obligation) to declare the Rescission Offer ineffective
and return the certificates or other instruments representing the Subject
Securities to the Offerees who have accepted the Rescission Offer.
Acceptances or rejections may be revoked in a written notice received by the
Company prior to the Expiration Date. Payment for Subject Securities as to
which the Rescission Offer has been accepted will be made within five
business days after the Expiration Date.
18
<PAGE>
Any Offeree who has not delivered a completed Election by the
Expiration Date shall be conclusively deemed to have rejected the Rescission
Offer, except to the extent applicable state laws provide otherwise. See
"-- State Law Notices To Certain Offerees" and "EXHIBIT B" attached to
this Prospectus.
The Election and the stock certificates or other instruments
representing the Subject Securities may be delivered by hand or courier
service, or by mail. The method of delivery of all documents is at the
election and risk of the Offeree. If delivery is by mail, delivery will be
deemed to have occurred on the date the Election is postmarked.
IF OFFEREES DESIRING TO ACCEPT THIS RESCISSION OFFER INTEND TO MAKE USE OF
THE MAILS TO RETURN THEIR STOCK CERTIFICATES OR OTHER INSTRUMENTS EVIDENCING
THE SUBJECT SECURITIES TO THE COMPANY, INSURED REGISTERED MAIL, RETURN
RECEIPT REQUESTED, IS RECOMMENDED.
FUNDING THE RESCISSION OFFER
The Company has entered into Underwriting Agreements with the
Rescission Underwriters to provide the Rescission Financing to fund the
Rescission Offer. The Rescission Underwriters include, among others, HEOF, a
limited partnership whose general partner is HEOF Management Corp., an
affiliate of Enron Economic Development Corporation, a wholly-owned
subsidiary of Enron Corporation, a Houston, Texas-based Fortune 500 energy
company. Subject to the terms and conditions of the Underwriting Agreements,
the Company has agreed to sell and the Rescission Underwriters have agreed to
purchase the number of shares of Class A Common Stock set forth opposite
their respective names in the table below, at a price of $1.37 per share.
<TABLE>
<CAPTION>
NUMBER OF
RESCISSION UNDERWRITER SHARES
---------------------- -------------
<S> <C>
Houston Economic Opportunity Fund, L.P..................... 1,605,840
Northern Neck Outfitters, Inc.............................. 729,927
Cress Brothers Investments, L.L.C.......................... 620,438
Leonard Childress.......................................... 411,672
TKNET Investments, Inc..................................... 119,708
Nancy Monthofer............................................ 72,993
Cynet Holdings, LLC........................................ 89,057
-------------
Total.................................... 3,649,635
-------------
-------------
</TABLE>
The Underwriting Agreements provide, among other things, that the
obligation of the Rescission Underwriters to purchase such shares of Class A
Common Stock is subject to the successful completion of the Rescission Offer.
For purposes of this Prospectus, the Rescission Offer will be successfully
completed if less than $5,000,000 is needed to fund the Rescission Offer. As
of the date of this Prospectus, the funds comprising the Rescission Financing
have been deposited into an interest-bearing escrow account with First Bank
Texas, N.A. of Houston, Texas, and will be disbursed as needed to Offerees
who accept the Rescission Offer. In addition, the Company will deposit such
additional amounts required to be held in escrow under Texas law, which
requires a minimum escrow deposit equal to the amount of the Rescission Offer
being made to Texas residents including accrued interest. As of October 31,
1999, the minimum escrow balance required will be $4,977,889.25 and will
continue to increase at a rate of $733.39 per day thereafter.
The proceeds from the Rescission Financing will be used to fund
$5,000,000 of the Rescission Offer. In the event that funds in excess of
$5,000,000 are needed to fund the Rescission Offer, the Company shall have
the right, on or before the Expiration Date, to either (i) with the consent
of the Rescission Underwriters, secure additional financing
19
<PAGE>
through the issuance of equity securities or the sale of assets in amounts
sufficient to satisfy the Company's rescission liabilities and complete the
Rescission Offer, or (ii) declare the entire Rescission Offer ineffective and
return all completed Elections, together with the certificates or other
instruments representing the Subject Securities, to the Offerees who accepted
the Rescission Offer and direct the escrow agent to return all of the funds
comprising the Rescission Financing to the Rescission Underwriters. Subject
to the foregoing, any unused proceeds of the Rescission Financing remaining
after the funding of the Rescission Offer will be, with the consent of the
Rescission Underwriters, paid to the Company for additional shares of Class A
Common Stock and used by the Company for general corporate purposes. See
"Risk Factors -- Lack of Sufficient Capital to Fund Rescission Offer;
Potential Rescission Liability," "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
As additional consideration for its participation in the Rescission
Financing, the Company has agreed to grant HEOF the HEOF Put Option,
requiring the Company to repurchase the shares of Class A Common Stock issued
to HEOF pursuant to its Underwriting Agreement at a price of $1.51 per share.
The HEOF Put Option will have a duration of one year from the closing of the
Rescission Financing. In the event that the HEOF Put Option is exercised, the
Company's shareholders' equity may be reduced by up to $2,420,000.
In the event the Company is required to pay more than $5,000,000 to
fund the Rescission Offer, but nevertheless elects to complete the Rescission
Offer, there can be no assurance that sufficient financing can be obtained or
that the Rescission Underwriters will consent to the Company obtaining such
additional financing or completing the Rescission Offer. See "Risk Factors --
Need for Additional Capital and Capital Requirements and -- Lack of Sufficient
Capital to Fund Rescission Offer; Potential Rescission Liability."
OTHER TERMS AND CONDITIONS
The proceeds from the Rescission Financing will be used to fund the
Rescission Offer. The Company will cancel all of the Subject Securities as to
which the Rescission Offer has been properly accepted.
The Company has not retained, nor does it intend to retain, any
person to make solicitations or recommendations to the Offerees in connection
with the Rescission Offer.
If a fully completed and executed Election is not delivered by the
Expiration Date by each person actually receiving notice of the Rescission
Offer through this Prospectus, the Rescission Offer will be deemed to have
been rejected by such person, except to the extent applicable state laws
provide otherwise.
Neither the Company, nor its officers and directors, may make any
recommendations to any holders of the Subject Securities with respect to the
Rescission Offer contained herein. Each person is urged to read this
Prospectus carefully and to make an independent evaluation with respect to
the Rescission Offer.
All questions as to the validity, form, eligibility (including time
of delivery) and proper completion of the Election will be determined by the
Company, which determination will be final and binding. The Company reserves
the absolute right to reject any Election not properly completed or if the
completed Election, in the opinion of counsel to the Company, would be
unlawful. The Company reserves the right to waive any irregularity in the
Election. The Company's interpretation of the terms and conditions of the
Rescission Offer will be final and binding. The Company will not be under any
duty to give notification of defects in connection with Elections or incur
any liability for failure to give such information.
20
<PAGE>
EFFECT OF RESCISSION OFFER
The Company has been advised by its counsel that it is unclear
whether the Rescission Offer will terminate the Company's liability, if any,
for failure to register the issuances of the Subject Securities under the
Securities Act or applicable state and foreign securities laws. The staff of
the Commission takes the position that a person's right of rescission under
federal securities law may, under certain circumstances, survive a rescission
offer, while most state securities laws provide that a person may lose any
rescission rights by rejecting or failing to respond to a valid rescission
offer. Generally, the statute of limitations for noncompliance with the
requirement to register securities under the Securities Act is one year,
while under the various state securities laws, the statute of limitations
ranges from one to seven years from the date of the transaction. The Company
is also subject to the anti-fraud provisions of applicable securities law or
rights under common law or equity in respect of the issuance of the Subject
Securities. Subject Securities held by Offerees who choose not to accept the
Rescission Offer will, for purposes of applicable federal and state
securities laws, be registered securities as of the Expiration Date and,
unless held by persons who may be deemed to be "affiliates" of the Company,
will be freely tradeable in the public market. Subject Securities held by
affiliates of the Company will be subject to certain restrictions on resale
contained in Rule 144 under the Securities Act. See "Shares Eligible for
Future Sale" for a discussion of Rule 144.
Specific provisions of the laws of certain states in which the
Offerees now reside or resided at the time they were issued the Subject
Securities are set forth in EXHIBIT B attached hereto.
TAX CONSIDERATIONS OF THE RESCISSION OFFER
The following discussion is a general summary of certain United
States federal income tax consequences associated with the Rescission Offer.
No attempt has been made to comment on all United States federal tax matters
relevant to the Rescission Offer. The summary is based on existing provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
Department regulations promulgated thereunder, published revenue rulings and
revenue procedures of the Internal Revenue Service ("IRS"), applicable
legislative history, and judicial decisions. All such authorities are subject
to change at any time, either prospectively or retroactively, and any such
change could adversely affect the federal income tax consequences associated
with the Rescission Offer. No ruling has been requested from the IRS
regarding any of the matters discussed in this summary.
This summary represents the judgment of the Company and its advisors
regarding the United States federal income tax consequences of the Rescission
Offer. However, there is no assurance that the tax consequences discussed in
this summary will be accepted by the IRS or the courts if the Rescission
Offer becomes the subject of administrative or judicial proceedings.
Realization of the tax consequences discussed in this summary with respect to
the Rescission Offer is subject to the risk that the IRS may challenge the
tax treatment and that a court could sustain such challenge. In such case,
the federal income tax consequences of the Rescission Offer could be
materially and adversely affected.
This summary does not attempt to specifically address the United
States federal income tax consequences of each Offeree who accepts the
Rescission Offer. Additionally, this summary does not discuss all of the tax
consequences, including state, local, and foreign tax consequences, that may
be significant to particular Offerees, such as dealers in securities, foreign
persons, Offerees who are not individuals, and Offerees who are subject to
the alternative minimum tax. ACCORDINGLY, ALL OFFEREES WHO ACCEPT THE
RESCISSION OFFER ARE STRONGLY URGED TO CONSULT, AND MUST RELY UPON, THEIR OWN
TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM WITH RESPECT TO AN
ACCEPTANCE OF THE RESCISSION OFFER, INCLUDING THE APPLICABILITY OF FEDERAL,
STATE, LOCAL, AND FOREIGN TAX LAWS.
The transaction resulting from an acceptance of the Rescission Offer
should be analyzed as a taxable redemption of the shares of Company stock
involved in the transaction. In such case, the redemption will be treated as
a sale or exchange of the shares only if the redemption satisfies the
requirements of one or more of the provisions
21
<PAGE>
of Section 302(b) of the Code. This determination is made separately for each
Offeree who accepts the Rescission Offer. Assuming that a redemption
satisfies the requirements of one or more of the provisions of Section 302(b)
of the Code, the Offeree recognizes gain or loss on the redemption in an
amount equal to the difference between the Offeree's adjusted basis in the
shares immediately prior to the redemption and the proceeds that the Offeree
receives in connection with the redemption (including the portion of the
proceeds measured by applying an interest factor to the Offeree's original
purchase price for the shares). The character of any such gain or loss will
depend on whether the shares constitute a capital asset in the hands of the
Offeree.
If a redemption does not satisfy the requirements of one or more of
the provisions of Section 302(b) of the Code, it will be treated as a
distribution by the Company that is subject to Section 301 of the Code. In
such case, the proceeds will be treated first as a dividend (taxed as
ordinary income) to the extent of the Company's current and accumulated
earnings and profits, if any, at the time of the redemption (on a pro rata
basis taking into account other Section 301 distributions made by the Company
during the year, including other redemptions resulting from the Rescission
Offer that are treated as Section 301 distributions), next as a non-taxable
return of the Offeree's adjusted basis in the shares immediately prior to the
redemption, and finally as amounts received from the sale or exchange of the
shares. The Company should not have either current or accumulated earnings
and profits for these purposes.
Under Section 302(b) of the Code, a redemption will be treated as a
sale or exchange of the shares if it either: (i) results in a "complete
redemption" of the Offeree's interest in the Company; (ii) is "substantially
disproportionate" with respect to the Offeree; or (iii) is "not essentially
equivalent to a dividend" with respect to the Offeree. These three tests,
which are more fully described below, are collectively referred to as the
"Redemption Tests" for purposes of this summary. The Redemption Tests are
applied on an Offeree-by-Offeree basis. As a result, it is possible that some
redemptions will satisfy the requirements of one or more of the Redemption
Tests, while other redemptions do not satisfy the requirements of one or more
of the Redemption Tests. Accordingly, it is possible that some persons will
receive sale or exchange treatment under Section 302(b) with respect to their
redemptions while other persons will be subject to Section 301 with respect
to their redemptions.
In determining whether the requirements of any of the Redemption
Tests are satisfied, an Offeree must take into account not only shares of
Company stock that are actually owned by the Offeree (including without
limitation shares of Class A Common Stock and Class B Common Stock received
upon conversion of the Series A Preferred Stock and Series B Preferred Stock)
but also shares of Company stock that the Offeree is deemed to own within the
meaning of the constructive ownership rules under Section 318 of the Code.
Under Section 318, an Offeree may constructively own shares of Company stock
actually owned (and, in some cases, constructively owned) by certain
individuals or entities that are considered related to the Offeree for this
purpose, as well as shares of Company stock that the Offeree has the right to
acquire by exercise of an option, warrant or a conversion right.
Additionally, contemporaneous or related transactions involving the stock, or
rights to acquire the stock, of the Company may affect an Offeree's ability
to satisfy one or more of the Redemption Tests.
A redemption will constitute a "complete redemption" of all shares
of Company stock owned by an Offeree for purposes of the first Redemption
Test specified above if all shares of Company stock owned by such Offeree are
sold pursuant to the Rescission Offer. For this purpose, an individual
Offeree can disregard shares of Company stock that he or she constructively
owns by attribution from family members if certain requirements specified in
Section 302(c) of the Code are satisfied. A redemption will be considered
"substantially disproportionate" with respect to an Offeree if the following
requirements are satisfied: (i) the percentage of the voting stock of the
Company owned by the Offeree immediately after the redemption (taking into
account all transactions consummated pursuant to the Rescission Offer) equals
less than 80 percent of the percentage of the voting stock of the Company
owned by such Offeree immediately before the redemption; (ii) the percentage
of the common stock of the Company (whether voting or nonvoting) owned by the
Offeree immediately after the redemption (taking into account all
transactions consummated pursuant to the Rescission Offer) equals less than
80 percent of the percentage of the common stock of the Company owned by such
Offeree immediately before the redemption; and (iii) the Offeree owns,
immediately after the redemption (taking into account all transactions
consummated pursuant to the Rescission Offer), less than 50% of the total
combined voting power of all classes of stock of the Company entitled to
vote. A redemption will satisfy the "not
22
<PAGE>
essentially equivalent to a dividend" test with respect to an Offeree if, in
light of the particular facts and circumstances surrounding the Offeree's
ownership of Company stock, the redemption results in a "meaningful
reduction" of the Offeree's interest in the Company (taking into account all
transactions consummated pursuant to the Rescission Offer).
THE FOREGOING SUMMARY IS FOR GENERAL INFORMATION ONLY, AND IS NOT INTENDED TO
CONSTITUTE, AND SHALL NOT BE CONSTRUED TO ANY EXTENT AS, LEGAL, TAX, OR
FINANCIAL ADVICE. EACH OFFEREE IS STRONGLY URGED TO CONSULT THE OFFEREE'S OWN
TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THE OFFEREE FROM
THE RESCISSION OFFER IN LIGHT OF THE OFFEREE'S SPECIFIC CIRCUMSTANCES,
INCLUDING THE TRANSACTION(S) IN WHICH THE OFFEREE ACQUIRED OWNERSHIP OF
SHARES OF THE COMPANY'S STOCK.
TRANSACTIONS NOT SUBJECT TO RESCISSION
Since its inception, the Company has raised capital through the
issuance of its securities pursuant to transactions which are not subject to
the Rescission Offer. The Company believes the issuance or sale of its
securities in these transactions was in accordance with applicable federal
and state securities laws as transactions not involving a public offering and
exempt from registration pursuant to Sections 3(b) or 4(2) of the Securities
Act. The following summary of the transactions not subject to the Rescission
Offer is qualified in its entirety by reference to the descriptions contained
in Part II of the Registration Statement of which this Prospectus is a part
under the caption, "Transactions Not Subject to Rescission Offer."
1. In May and August of 1995 the Company issued an aggregate of 10,000,000
shares of Class A Common Stock (after giving effect to a nine for one
share dividend) to its founding shareholders. See "Management --
Certain Transactions." At the time of the offering, the Company
believed such founding shareholders were sophisticated investors and
received adequate information concerning an investment in the Company.
As a result, the Company believes the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
2. Between May 1996 and July 1996, the Company issued Vickroy Stone an
aggregate of 500,000 shares of Class A Common Stock for services
rendered valued at $500,000. In February 1997, the Company repurchased
450,000 of such shares of Class A Common Stock from Mr. Stone at a
purchase price of $1.00 per share. In February 1997, Mr. Stone sold
the remaining 50,000 shares of Class A Common Stock to a partnership
related to Ray C. Davis, the founder of the Company, for $1.00 per
share. See "Management-- Certain Transactions." At the time of the
offering, the Company believed Mr. Stone was a sophisticated investor
and received adequate information concerning an investment in the
Company. As a result, the Company believes the transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
3. In July 1996, the Company issued an aggregate of 1,050,000 of Class A
Common Stock to the principals of International Fax Corporation ("IFC")
and IMedia, S.A. of France ("Imedia") in connection with (i) an
agreement granting the Company a right of first refusal to acquire all
of the outstanding capital stock of IMedia, (ii) the right to utilize
IMedia's European network of fax broadcasting equipment and (iii) the
agreement of IMedia to use the Company's network for fax broadcast
traffic to the United States. The shares of Class A Common Stock were
valued by the Company at $1.00 per share. Subsequent to this series of
transactions, the Company wrote off the value of its investment. See
"Management -- Certain Transactions." At the time of the offering, the
Company believed such principals were sophisticated investors and
received adequate information concerning an investment in the Company.
As a result, the Company believes the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
23
<PAGE>
4. In May 1997, the Company issued a five-year warrant to Vickroy Stone
entitling Mr. Stone to purchase an aggregate of 450,000 shares of
Class A Common Stock at an exercise price of $2.00 per share.
Inasmuch as the exercise price of this warrant exceeded the fair
market value of the underlying Class A Common Stock, the Company
determined that these warrants had no value at the date of issuance.
See "Management--Certain Transactions." At the time of the offering,
the Company believed Mr. Stone was a sophisticated investor and
received adequate information concerning an investment in the Company.
As a result, the Company believes the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
5. In July 1997, the Company issued Sam McKinley 400,000 shares of Class B
Common Stock in payment of a loan commitment fee. The Company
subsequently determined that it received no value in exchange for such
shares. At the time of the offering, the Company believed Mr. McKinley
was a sophisticated investor and received adequate information
concerning an investment in the Company. As a result, the Company
believes the transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
6. From December 1997 through January 1998, the Company issued 2,421,580
shares of its Class A Common Stock to a limited number of investors in
exchange for their members' net equity interests in certain affiliated
limited liability companies. At the time of the offering, the Company
believed such investors were sophisticated investors and received
adequate information concerning an investment in the Company. As a
result, the Company believes the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
7. On November 14, 1997, the Company entered into a Settlement Agreement
and Mutual Release with Keith Shaffner for services rendered by him
during 1996 and 1997. In exchange for a complete release of all
claims by Mr. Shaffner and his affiliate, CyFax, Inc. ("CyFax"),
against the Company, the Company issued to Mr. Shaffner: (i) a warrant
entitling Mr. Shaffner to purchase 1,150,000 shares of Class B Common
Stock at a price of $1.00 per share, exercisable on or before
August 30, 1999 (which the Company has agreed to extend until
November 4, 2001), (ii) a warrant entitling Mr. Shaffner to purchase
1,050,000 shares of Class B Common Stock at a price of $1.00 per share,
exercisable on or before February 28, 2000 (which the Company has
agreed to extend until November 4, 2001), (iii) 500,000 shares of
Class A Common Stock and (iv) $51,000 in cash. In addition, the
Company issued 200,000 shares of Class A Common Stock to CyFax for the
termination of an exclusive agent management agreement with the
Company. During 1996 and 1997, the Company paid Mr. Shaffner,
individually, an aggregate of $202,951 for services rendered and paid
CyFax an aggregate of $893,527 for services rendered. See
"Management-- Certain Transactions." Mr. Shaffner subsequently
assigned his right to receive such warrants to certain individuals
and entities. See "Plan of Distribution and Selling Shareholders."
At the time of these offerings, the Company believed Mr. Shaffner was
a sophisticated investor and received adequate information concerning
an investment in the Company. As a result, the Company believes the
transactions were exempt from registration pursuant to Section 4(2)
of the Securities Act as transactions by an issuer not involving a
public offering.
8. In April 1998 the Company issued a five-year warrant entitling Ray
Davis to purchase an aggregate of 2,000,000 shares of Class A Common
Stock at a price of $1.00 per share in connection with the execution of
his Employment Agreement with the Company. See "Management --
Employment Agreements" and "Management -- Certain Transactions."
Mr. Davis subsequently assigned this warrant to certain individuals.
See "Principal Shareholders." At the time of the offering, the Company
believed Mr. Davis was a sophisticated investor and received adequate
information concerning an investment in the Company. As a result, the
Company believes the transaction was exempt from registration pursuant
to Section 4(2) of the Securities Act as a transaction by an issuer
not involving a public offering.
9. In May 1998 the Company issued five-year warrants entitling certain
individuals and entities to purchase an aggregate of 350,954 shares of
Class B Common Stock at prices of $1.00 and $2.00 per share. Inasmuch
as
24
<PAGE>
the exercise prices of these warrants exceeded the fair market value
of the underlying Class B Common Stock, the Company determined that
these warrants had no value at the date of issuance. At the time of
the offering, the Company believed such individuals and entities
were sophisticated investors and received adequate information
concerning an investment in the Company. As a result, the Company
believes the transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
10. In July 1998, the Company entered into the Holdings Subscription
Agreement, pursuant to which Cynet Holdings committed to purchase up
to 10,000,000 shares of Class A Common Stock of the Company for $1.00
per share prior to December 31, 1998. The Holdings Subscription
Agreement was subsequently amended to extend the duration of the
agreement to December 31, 1999. As of August 31, 1999, Cynet Holdings
has purchased an aggregate of 4,106,000 shares of Class A Common Stock
pursuant to the Holdings Subscription Agreement. Also pursuant to the
Holdings Subscription Agreement, the Company issued a five-year warrant
entitling Cynet Holdings to purchase an aggregate of 4,800,000 shares
of Class A Common Stock at a price of $1.00 per share. See
"Management-- Certain Transactions." At the time of the offering, the
Company believed Cynet Holdings was a sophisticated investor and
received adequate information concerning an investment in the Company.
As a result, the Company believes the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
11. In September 1999, the Company agreed to issue a warrant entitling
Michael Silvert to purchase 100,000 shares of Class B Common Stock at
a price of $1.00 per share. This warrant will be issued upon the
completion of the Rescission Offer in satisfaction of certain claims by
Mr. Silvert that he was entitled to receive such warrant in exchange
for providing services to the Company during 1997. At the time
Mr. Silvert performed such services in 1997, the Company believed
Mr. Silvert was a sophisticated investor and received adequate
information concerning an investment in the Company. As a result, the
Company believes the transaction was exempt from registration pursuant
to Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
STATE LAW NOTICES TO CERTAIN OFFEREES
NOTICE TO ARIZONA RESIDENTS
THESE SECURITIES ARE (ARE NOT) REGISTERED UNDER THE SECURITIES ACT OF
ARIZONA, BUT THE FACT OF THE REGISTRATION IS NOT TO BE DEEMED A FINDING BY THE
ARIZONA CORPORATION COMMISSION OR THE DIRECTOR OF THE SECURITIES DIVISION THAT
THIS PROSPECTUS IS TRUE OR ACCURATE, NOR DOES THE REGISTRATION MEAN THAT THE
COMMISSION OR THE DIRECTOR HAS PASSED ON THE MERITS OF OR OTHERWISE APPROVED THE
SECURITIES DESCRIBED IN THIS PROSPECTUS.
NOTICE TO CALIFORNIA RESIDENTS
THIS OFFER OF REPURCHASE HAS (HAS NOT) BEEN APPROVED BY THE CALIFORNIA
COMMISSIONER OF CORPORATIONS IN ACCORDANCE WITH SECTION 25507(B) OF THE
CORPORATE SECURITIES LAW OF 1968 ONLY AS TO ITS FORM. SUCH APPROVAL DOES NOT
IMPLY A FINDING BY THE COMMISSIONER THAT ANY STATEMENTS MADE HEREIN OR IN ANY
ACCOMPANYING DOCUMENTS ARE TRUE OR COMPLETE NOR DOES IT IMPLY A FINDING THAT THE
AMOUNT OFFERED BY THE SELLER IS EQUAL TO THE AMOUNT RECOVERABLE BY THE BUYER OF
THE SECURITY IN ACCORDANCE WITH SECTION 25503 IN A SUIT AGAINST THE SELLER, AND
THE COMMISSIONER DOES NOT ENDORSE THE OFFER AND MAKES NO RECOMMENDATION AS TO
ITS ACCEPTANCE OR REJECTION.
The Company may have incurred liability under Section 25503 by failing
to qualify the Subject Securities under Section 25110. If the Company violated
Section 25110, it is liable to the purchasers of such securities for an amount
equal to the consideration paid with interest thereon at the legal rate, less
the amount of any income received therefrom, upon tender of such security. The
Company's liability, if any, may be terminated by this Rescission Offer under
Section 25507(b).
25
<PAGE>
An Offeree's right of action, if any, under Sections 25500, 25501
and 25502 and under common law, is not necessarily foreclosed by acceptance
or rejection of the Rescission Offer.
Under Section 25534, if the Commissioner determines that the Subject
Securities were offered or sold in violation of Section 25110, the Commissioner
may, by written order to the Company and the holders of such securities, require
certificates evidencing such securities to have stamped or printed prominently
on their face a legend, in the form prescribed by rule of the Commissioner,
restricting the transfer of such securities.
The complete text of the foregoing sections of the Corporate Securities
Law of 1968 is set forth in EXHIBIT B attached hereto.
NOTICE TO HAWAII RESIDENTS
NEITHER THIS PROSPECTUS NOR THE SECURITIES DESCRIBED HEREIN HAVE BEEN
APPROVED OR DISAPPROVED BY THE COMMISSIONER OF SECURITIES OF THE STATE OF HAWAII
NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS.
NOTICE TO ILLINOIS RESIDENTS
From August 1996 through April 1997, 65,000 shares of Class A Common
Stock, 17,000 shares of Convertible Non-Voting Series A Preferred Stock (which
were subsequently converted into 20,400 shares of Class A Common Stock) and
18,000 shares of Convertible Non-Voting Series B Preferred Stock (which were
subsequently converted into 21,600 shares of Class B Common Stock) were offered
and sold to residents of the State of Illinois for an aggregate price of
$153,000.
The sale of these securities may not have been in compliance with the
Illinois Securities Law of 1953 (the "1953 Act"), in which case the sale is
voidable at the buyer's option in accordance with the provisions of Section 13
of the 1953 Act. Therefore, the Company hereby offers to rescind and set aside
such sales, to release each buyer from all contractual obligations the Company
required each buyer to undertake in order to effectuate such sales and to refund
the full amount paid for the securities, plus interest at the rate of 10% per
annum from the date of payment for the securities to the date of refund. This
sum will be reduced by any income or other amount received due to ownership of
such securities.
Should you decide to accept this offer of rescission, please offer, in
writing, to return the securities or return the securities to the Company
together with a written notice of your election to accept such offer of
rescission. The election form attached hereto as EXHIBIT A may be used to
indicate your acceptance of this offer. Upon receipt of these materials, the
amount paid for the securities, plus interest, will be refunded to you and you
will be released from any and all contractual obligations the Company required
that you undertake in order to effectuate the sale.
This Rescission Offer is only good for thirty (30) days after your
receipt of this Prospectus. If you fail to accept this offer within that period,
your rights to recover under the 1953 Act may be extinguished. You should also
note that any decision to reject this offer is not binding until thirty (30)
days have elapsed from the date of receipt of this Prospectus. However, failure
to accept this offer within thirty (30) days of receipt shall constitute a
non-acceptance of this offer.
The complete text of Section 13 of the 1953 Act is set forth in EXHIBIT
B attached hereto.
NOTICE TO INDIANA RESIDENTS
Pursuant to Order No. 90-0019 of the Indiana Securities Commission,
failure to respond to this Rescission Offer will be deemed an ACCEPTANCE of the
offer.
NOTICE TO IOWA RESIDENTS
THIS IS A RESCISSION OFFER MADE PURSUANT TO SECTION 502.504(4) OF THE
IOWA UNIFORM SECURITIES ACT AND A COPY IS ON FILE WITH THE IOWA SECURITIES
BUREAU. THE BUREAU MAKES NO RECOMMENDATION AS TO WHETHER THE OFFER SHOULD BE
ACCEPTED OR REJECTED NOR HAS THE BUREAU PASSED UPON THE ADEQUACY OF THIS OFFER.
26
<PAGE>
The Company may have incurred liability under Section 502.501 of the
Iowa Uniform Securities Act by failing to register the Subject Securities in
accordance with Section 502.201. An Offeree purchasing such securities may sue
under Section 502.501 to recover the consideration paid for the securities,
together with interest at the legal rate from the date of payment, less the
amount of any income received on the security, upon tender of the securities. An
Offeree's right to sue under Section 502.501 may be lost unless the Offeree
accepts the Rescission Offer within 30 days after receipt thereof.
The complete text of the foregoing sections of the Iowa Uniform
Securities Act is set forth in EXHIBIT B attached hereto.
NOTICE TO LOUISIANA RESIDENTS
THESE SECURITIES HAVE BEEN REGISTERED WITH THE SECURITIES COMMISSIONER
OF THE STATE OF LOUISIANA. THE SECURITIES COMMISSIONER, BY ACCEPTING
REGISTRATION, DOES NOT IN ANY WAY ENDORSE OR RECOMMEND THE PURCHASE OF ANY OF
THESE SECURITIES.
NOTICE TO MARYLAND RESIDENTS
Failure to respond to this Rescission Offer will be deemed an
ACCEPTANCE of the Rescission Offer.
NOTICE TO MICHIGAN RESIDENTS
As required by Section 410(e) of the Michigan Uniform Securities Act,
the entire text of Section 410(e) is included in EXHIBIT B attached hereto.
NOTICE TO MISSISSIPPI RESIDENTS
The Company may have incurred liability under Section 75-71-717 of the
Mississippi Securities Act by failing to register the Subject Securities in
accordance with Section 75-71-401. A buyer of such securities may sue under
Section 75-71-717 to recover the consideration paid for the securities, together
with interest at eight percent (8%) from the date of payment, less the amount of
any income received on the securities, upon tender of the securities.
A buyer's right to sue under Section 75-71-717 may be lost if, before
suit is commenced, the buyer receives a written offer (i) to repurchase such
securities for cash payable on delivery of the securities equal to the
consideration paid, together with interest at six percent (6%) from the date of
payment, less the amount of any income received on the securities, (ii) stating
that the offer may be accepted by the buyer at any time within thirty (30) days
of its receipt and (iii) the buyer fails to accept such offer in writing within
the specified period.
The complete text of the foregoing sections of the Mississippi
Securities Act is set forth in EXHIBIT B attached hereto.
NOTICE TO NEVADA RESIDENTS
The Company may have incurred liability under Section 90.660 of the
Nevada Uniform Securities Act by failing to register the Subject Securities in
accordance with Section 90.460. An Offeree purchasing such securities may sue
under Section 90.660 to recover the consideration paid for the securities,
together with interest at the legal rate from the date of payment, less the
amount of any income received on the securities, upon tender of the securities.
An Offeree's right to sue under Section 90.660 may be lost unless the Offeree
accepts the Rescission Offer within 30 days after receipt thereof.
The complete text of the foregoing sections of the Nevada Uniform
Securities Act is set forth in EXHIBIT B attached hereto.
NOTICE TO NEW HAMPSHIRE RESIDENTS
The Company may have incurred liability under NH RSA 421-B:25 of the
New Hampshire Uniform Securities Act by failing to register the Subject
Securities in accordance with NH RSA 421-B:11. An Offeree purchasing such
27
<PAGE>
securities may sue under NH RSA 421-B:25 to recover the consideration paid
for the securities, together with interest at 10% from the date of payment,
less the amount of any income received on the securities, upon tender of the
securities.
Only Class A Common Stock previously sold to New Hampshire investors is
being registered in order to effect the Rescission Offer. None of the Class B
Common Stock, Series A Preferred Stock, Series B Preferred Stock, Warants to
Purchase Class A Common Stock and none of the shares of Class B Common Stock
to be sold by the Selling Shareholders are being registered for sale or
offered for sale in New Hampshire.
The complete text of NH RSA 421-B:25 of the New Hampshire Uniform
Securities Act is set forth in EXHIBIT B attached hereto.
NOTICE TO NORTH CAROLINA RESIDENTS
The Company may have incurred liability under Section 78a-56 of the
North Carolina Securities Act by failing to register the Subject Securities in
accordance with Section 78a-24. An Offeree purchasing such securities may sue
under Section 78a-56 to recover the consideration paid for the securities,
together with interest at the legal rate from the date of payment, less the
amount of any income received on the securities, upon tender of the securities.
An Offeree's right to sue under Section 78a-56 may be lost unless the Offeree
accepts the Rescission Offer within 30 days after receipt thereof.
The complete text of the foregoing sections of the North Carolina
Securities Act is set forth in EXHIBIT B attached hereto.
NOTICE TO OREGON RESIDENTS
Under Section 59.125 of the Oregon Securities Law, an Offeree's right
to sue under Section 59.115 may be lost unless (i) the Offeree accepts the
Rescission Offer within 30 days after receipt thereof and has not been paid the
full amount offered or (ii) the Offeree no longer owns the Subject Securities
and gives the Company written notice of the inability to tender such securities
to the Company.
The complete text of the foregoing sections of the Oregon Securities
Law is set forth in EXHIBIT B attached hereto.
NOTICE TO PENNSYLVANIA RESIDENTS
From September 1996 through December 1997, 42,500 shares of Class A
Common Stock, 5,000 shares of Convertible Non-Voting Series A Preferred Stock
(which were subsequently converted into 6,000 shares of Class A Common Stock)
and 8,900 shares of Convertible Non-Voting Series B Preferred Stock (which were
subsequently converted into 10,680 shares of Class B Common Stock) were offered
and sold to residents of the Commonwealth of Pennsylvania. It appears as if the
provisions of Section 201 of the Pennsylvania Securities Act of 1972 ("1972
Act") relating to registration of securities may not have been complied with in
connection with the offer or sale of these securities. Accordingly, the Company
is offering to repurchase these securities from you for your purchase price for
cash plus 6% interest from the date of purchase less any dividends, interest
payment or cash distributions paid to date. The enclosed disclosure materials
should be reviewed carefully before deciding whether to accept or reject the
offer to repurchase your securities. This Rescission Offer remains open for 30
days from the date you received this Notice. During such time you may either
accept or reject the offer.
If you no longer own the securities which are the subject of this offer
to repurchase, the Company offers to pay you, upon acceptance of the offer, an
amount in cash equal to the damages, if any, computed in accordance with Section
502 of the 1972 Act as more fully described in the accompanying disclosure
materials.
If you affirmatively REJECT the offer or fail to affirmatively ACCEPT
the offer within 30 days in the manner described in the accompanying disclosure
materials, any rights you may have with respect to any failure to comply with
Section 201 of the 1972 Act will be terminated.
The complete text of the foregoing sections of the 1972 Act is set
forth in EXHIBIT B attached hereto.
NOTICE TO TENNESSEE RESIDENTS
The Company may have incurred liability under Section 48-2-122 of the
Tennessee Securities Act of 1980 by failing to register the Subject Securities
in accordance with Section 48-2-104. An Offeree purchasing such securities may
sue under Section 48-2-122 to recover the consideration paid for the securities,
together with interest at the legal rate from the date of payment, less the
amount of any income received on the securities, upon tender of the securities.
28
<PAGE>
Unless the Rescission Offer is accepted within 30 days after receipt thereof,
the offer of rescission will be deemed to have been rejected.
Offerees may wish to consult with independent counsel before
deciding to accept or reject the Rescission Offer so as to be fully informed
about the risks and the consequences attached to either choice.
The complete text of the foregoing sections of the Tennessee
Securities Act of 1980 is set forth in EXHIBIT B attached hereto.
NOTICE TO TEXAS RESIDENTS
The Company may have incurred liability under Section 33 of the
Texas Securities Act of 1957 by failing to register the Subject Securities in
accordance with Section 7A. An Offeree purchasing such securities may sue
under Section 33 to recover the consideration paid for the securities,
together with interest at the legal rate from the date of payment, less the
amount of any income received on the securities, upon tender of the
securities.
AN OFFEREE'S RIGHT TO SUE WILL BE LOST UNLESS THE OFFEREE (i)
ACCEPTS THE OFFER BUT DOES NOT RECEIVE THE AMOUNT OF THE OFFER, IN WHICH CASE
HE MAY SUE WITHIN THE TIME ALLOWED BY SECTION 33H(1)(a) OR 33H(2)(a) OR (b),
AS APPLICABLE; OR (ii) REJECTS THE OFFER IN WRITING WITHIN 30 DAYS OF ITS
RECEIPT AND EXPRESSLY RESERVES IN THE REJECTION HIS RIGHT TO SUE, IN WHICH
CASE HE MAY SUE WITHIN ONE YEAR AFTER HE SO REJECTS.
The name and address of the bank where the amount of the Rescission
Offer will be paid is First Bank Texas, N.A., 8820 Westheimer Road, Houston,
Texas. Offerees accepting the Rescission Offer will receive the amount of the
offer not later than 30 days after receipt by First Bank Texas, N.A., in a
form reasonably acceptable to the Company, and in compliance with the
instructions herein, of the security, if the Offeree still owns it, or
evidence of the fact and date of disposition if the Offeree no longer owns it.
The complete text of the foregoing sections of the Texas Securities
Act of 1957 is set forth in EXHIBIT B attached hereto.
NOTICE TO WISCONSIN RESIDENTS
The Company may have incurred liability under Section 551.59 of the
Wisconsin Uniform Securities Law by failing to register the Subject
Securities in accordance with Section 551.21. An Offeree purchasing such
securities may sue under Section 551.59 to recover the consideration paid for
the securities, together with interest at the legal rate under Section 138.04
from the date of payment, less the amount of any income received on the
securities, upon tender of the securities. An Offeree's right to sue under
Section 551.59 may be lost unless the Offeree accepts the Rescission Offer
within 30 days after receipt thereof.
The complete text of Sections 551.21 and 551.59 of the Wisconsin
Uniform Securities Law is set forth in EXHIBIT B attached hereto.
29
<PAGE>
USE OF PROCEEDS
Neither the Rescission Offer nor the resale of Class B Common Stock
underlying the Shaffner Warrants will result in any proceeds to the Company.
However, any cash exercises of the Shaffner Warrants to purchase shares of
Class B Common Stock will result in gross proceeds to the Company up to a
maximum amount of $2,200,000. See "Plan of Distribution and Selling
Shareholders." The Company will use the proceeds, if any, from the exercise
of the Shaffner Warrants for general corporate purposes.
The proceeds to be received by the Company from the Rescission
Financing are $5,000,000. The Company will use the proceeds of the Rescission
Financing to fund $5,000,000 of the Rescission Offer. To the extent funds in
excess of $5,000,000 are needed to fund the Rescission Offer, the Company
shall have the right (but not the obligation) to (i) with the consent of the
Rescission Underwriters, secure additional financing through the issuance of
equity securities or the sale of assets in amounts sufficient to satisfy the
Company's rescission liabilities and complete the Rescission Offer, or (ii)
declare the entire Rescission Offer ineffective and return all completed
Elections, together with the certificates or other instruments representing
the Subject Securities, to the Offerees who accepted the Rescission Offer and
direct the escrow agent to return the funds comprising the Rescission
Financing to the Rescission Underwriters. Any unused proceeds of the
Rescission Financing remaining after the funding of the Rescission Offer
which are not returned to the Rescission Underwriters will be used for
working capital, capital expenditures and general corporate purposes.
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its Common
Stock to date. The current policy of the Board of Directors is to retain
earnings, if any, to provide funds for operating and expansion of the
Company's business. Such policy will be reviewed by the Board of Directors of
the Company from time to time in light of, among other things, the Company's
earnings and financial position. The Company is required to pay dividends on
its Series A and Series B Preferred Stock prior to the payments, if any, of
dividends on its Class A and Class B Common Stock. As of June 30, 1999, the
Company had accrued, but unpaid, dividends of $368,428 on its Series A
Preferred Stock and $192,341 on its Series B Preferred Stock. During the
fiscal year ended December 31, 1998, the Company has not paid any dividends
on its Series A or Series B Preferred Stock since June, 1997.
30
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Company as of June 30, 1999, and as adjusted to reflect $1,000,000,
$3,000,000 and $5,000,000 acceptance of the Rescission Offer.(1)
<TABLE>
<CAPTION>
JUNE 30, $1,000,000 (1)(3) $3,000,000 (1)(3) $5,000,000 (3)
1999 ACCEPTANCE ACCEPTANCE ACCEPTANCE
------------- ----------------- ----------------- --------------
<S> <C> <C> <C> <C>
Assets:
Cash........................ $ 120,018 $ 4,120,018 $ 2,120,018 $ 120,018
Deferred offering costs (2). 2,078,825 - - -
------------- ------------- ------------- -------------
$ 2,198,843 $ 4,120,018 $ 2,120,018 $ 120,018
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Liabilities:
Accrued stock rights $ 50,000 $ 50,000 $ 50,000 $ 50,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Stock and warrants subject to
rescission:
Preferred stock - Series A.. 201,265 - - -
Preferred stock - Series B.. 229,923 - - -
Common stock - Class A...... 7,952,134 - - -
Common stock - Class B...... 5,365,047 - - -
Common stock warrants -
Class A..................... 201,640 - - -
------------- ------------- ------------- -------------
$ 13,950,009 $ - $ - $ -
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Redeemable voting Class A Common
Stock, 1,605,840 shares at $1.37 per
share, subject to a put option valid
through one year from effective date
of rescission offer at $1.51 per
share............................ $ - $ 2,420,000 $ 2,420,000 $ 2,420,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Capital deficit: (4)
Cumulative convertible
preferred stock:
Series A................. $ - $ 164,378 $ 138,992 $ 113,605
Series B................. 30,000 209,533 181,805 154,078
Common stock:
Class A.................. 6,331,703 15,294,446 14,342,672 13,390,898
Class B.................. 700,000 4,989,553 4,327,074 3,664,595
Outstanding warrants........ 362,500 521,850 497,240 472,630
Deficit..................... (18,433,153) (19,179,852) (19,736,992) (20,294,132)
Treasury stock.............. (317,767) (22,779) (68,337) (113,895)
------------- ------------- ------------- -------------
Total Capitalization........ $ (11,326,717) $ 1,977,129 $ (317,546) $ (2,612,221)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
- ---------------------
(1) The table assumes that the Rescission Underwriters elect to acquire
3,649,635 shares of Class A Common Stock pursuant to the terms of the
Rescission Financing.
(2) See Note 3 in the Notes to the Consolidated Financial Statements for a
discussion regarding the treatment of deferred offering costs upon
acceptance or rejection of the Rescission Offer.
(3) For each level of acceptance, the following pro forma adjustments,
including amounts are needed to properly reflect the effect of the proposed
rescission offer and rescission financing on total capitalization of the
Company. The acceptance amount was prorated based on the securities subject
to rescission and the acceptance amount, see adjustments as follows:
31
<PAGE>
<TABLE>
<CAPTION>
(a) Adjustment to shares Shares Amount $1,000,000 $1,000,000 $3,000,000 $3,000,000 $5,000,000 $5,000,000
and amount subject to Subject to Subject to Acceptance Acceptance Acceptance Acceptance Acceptance Acceptance
rescission adjusted for Rescission Rescission Shares Amount Shares Amount Shares Amount
rescission financing: ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash $4,000,000 $2,000,000 $ -
To record issuance of
1,605,840 redeemable
voting Class A shares at
$1.37 per share, subject
to a put option valid
through one year from
effective date of
rescission offer at
$1.51 per share, issued
in connection with financing
the rescission offer 1,605,840 $2,200,000 1,605,840 $2,200,000 1,605,840 $2,200,000
To record issuance of
2,043,795 shares of voting
Class A common stock issued
in connection with the
financing of rescission offer 2,043,795 $2,800,000 2,043,795 $2,800,000 2,043,795 2,800,000
Cumulative convertible
preferred stock:
Series A 103,500 $ 201,265 96,081 $ 186,837 81,242 $ 157,982 66,404 $ 129,127
Series B 77,349 $ 229,923 71,804 $ 213,441 60,715 $ 180,477 49,625 $ 147,513
Common stock:
Class A 5,514,491 $7,952,134 5,119,188 $7,382,089 4,328,581 $6,241,999 3,537,973 $5,101,909
Class B 2,719,733 $5,365,047 2,524,770 $4,980,456 2,134,844 $4,211,274 1,744,919 $3,442,092
Outstanding warrants 799,000 $ 201,640 741,724 $ 187,186 627,172 $ 158,277 512,620 $ 129,368
</TABLE>
<TABLE>
<CAPTION>
(b) Reclassification of $1,000,000 $3,000,000 $5,000,000
amounts recorded in Acceptance Acceptance Acceptance
treasury stock that are Amount Amount Amount
no longer subject to ---------- ---------- ----------
rescission
<S> <C> <C> <C>
$ (294,988) $ (249,430) $ (203,872)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
(c) Adjustment recording $1,000,000 $3,000,000 $5,000,000
cost of capital: Acceptance Acceptance Acceptance
Amount Amount Amount
---------- ---------- ----------
<S> <C> <C> <C>
Cumulative convertible
preferred stock:
Series A $ 27,783 $ 23,492 $ 19,201
Series B 35,880 30,339 24,798
Common stock:
Class A 1,097,714 928,183 758,652
Class B 740,592 626,215 511,838
Outstanding warrants 27,836 23,537 19,238
---------- ---------- ----------
$1,929,805 $1,631,766 $1,333,727
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
(d) Recording of interest $1,000,000 $3,000,000 $5,000,000
expense: Acceptance Acceptance Acceptance
Amount Amount Amount
---------- ---------- ----------
<S> <C> <C> <C>
$ 147,338 $ 442,013 $ 736,688
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
(e) Adjustment recognizing $1,000,000 $3,000,000 $5,000,000
deferred offering Acceptance Acceptance Acceptance
costs as expense: Amount Amount Amount
---------- ---------- ----------
<S> <C> <C> <C>
$ 149,020 $ 447,059 $ 745,098
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
(f) Adjustment reclassifying $1,000,000 $3,000,000 $5,000,000
dividends paid recorded as Acceptance Acceptance Acceptance
a reduction of rescission Amount Amount Amount
liability: ---------- ---------- ----------
<S> <C> <C> <C>
Cumulative convertible
preferred stock:
Series A $ 5,324 $ 4,502 $ 3,679
Series B 1,972 1,667 1,363
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C>
Common stock:
Class A 173,356 146,583 119,810
Class B 49,689 42,015 34,341
---------- ---------- ----------
$ 230,341 $ 194,767 $ 159,193
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
(g) Adjustment to accrete $1,000,000 $3,000,000 $5,000,000
the put option Acceptance Acceptance Acceptance
Amount Amount Amount
---------- ---------- ----------
<S> <C> <C> <C>
$ 220,000 $ 220,000 $ 220,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
(4) Outstanding stock $1,000,000 $3,000,000 $5,000,000
and warrants subsequent Acceptance Acceptance Acceptance
to proposed rescission Amount Amount Amount
offer Cumulative convertible ---------- ---------- ----------
preferred stock:
<S> <C> <C> <C>
Series A 96,081 81,242 66,404
Series B 71,804 60,715 49,625
Common stock:
Class A 26,439,404 25,648,797 24,858,189
Class B 2,942,840 2,552,914 2,162,989
Outstanding warrants
Class A 7,991,724 7,877,172 7,762,620
Class B 2,550,954 2,550,954 2,550,954
</TABLE>
33
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table presents summary historical data of the Company on
a consolidated basis (i) from the audited financial statements of the Company
for the years ended December 31, 1998 and 1997 and (ii) from the unaudited
financial statements of the Company for the six months ended June 30, 1999 and
1998. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1998 1997 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 8,947,732 $ 4,960,355 $ 4,534,254 $ 4,234,585
Loss from operations.............................. (4,230,362) (7,958,870) (1,199,263) (1,837,574)
Net loss applicable to common shareholders........ (4,396,883) (8,502,067) (1,353,645) (1,862,439)
Net loss per common share......................... $ (0.19) $ (0.60) $ (0.05) $ (0.08)
Weighted average number of common shares
outstanding....................................... 23,109,154 14,086,177 25,015,773 22,441,445
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit)(1)................................................. $ (885,068) $ 368,901
Total assets................................................................. 5,297,713 5,147,083
Stock and warrants subject to rescission..................................... 13,980,009 13,950,009
Capital deficit.............................................................. (12,218,072) (11,326,717)
</TABLE>
- --------------------------
(1) Includes $2,078,825 of deferred offering costs. See Note 3 of the
Notes to the Consolidated Financial Statements.
34
<PAGE>
BUSINESS
SERVICES
The Company is an Internet business solutions provider. The
Company's products and services are offered through MESSAGING which includes
fax, data, voice, e-mail and mobile messaging, and INTERNET SERVICES which
includes custom application development, e-commerce development, web content
creation, web hosting and Internet access.
The Company is a Texas corporation and was founded in 1995 to
provide fax services for business-to-business communication. The Company
capitalized on the dramatic increase in the usage of third-party fax services
and created a niche market for itself with its HYPERCAST fax broadcast
desktop client software and related services. In 1997, the Company introduced
HYPERLINE, its point-to-point desktop software and fax service in order to
expand its fax service.
In response to the rapid growth and popularity of e-mail and the
Internet as a primary communications medium, the Company has set out to
become a full service Internet messaging provider. In 1998, the Company added
to its product offering HYPERWEB, its Internet-to-fax service; HYPERMAIL, its
fax-to-e-mail service; WEBCAST, its e-mail broadcast service; TELECAST, its
voice broadcast service; and HYPERCOMM, its teleconferencing service. To
further enhance its messaging services, the Company, through its subsidiary,
Worldwide Marketing Services, Inc., added enhancement services such as list
procurement, full-service graphic design and copy development services for
its customers. These additional services enabled the Company to provide its
customers with complete messaging solutions with "end-to-end" control of the
solutions.
In July 1999, the Company began offering Internet-based services by
acquiring Cynet Interactive, a wholly-owned subsidiary of Cynet Holdings. The
acquisition of Cynet Interactive allowed the Company to expand its messaging
and broadcast enhancement services to include web site design, Internet
application development for e-commerce and other Internet-based
applications, and web site hosting. Through a series of projects, the Company
has integrated its messaging services with Internet applications, creating
more effective solutions for its customers. The Company's current Internet
projects include the development of on-line shopping malls, integrated
procurement centers, live auctions and Internet web-based magazines for
customers. In July 1999, the Company entered into a strategic alliance with
IXC Communications to enable the Company to further expand its products and
services to include Internet access for business customers. The Company
expects its alliance with IXC Communications will enable the Company to
provide complete, "end-to-end" Internet business solutions just as it is able
to provide complete, "end-to-end" messaging business solutions. The Company's
solutions selling approach allows the Company to effectively deliver its
customers' messages irrespective of the transmission medium.
STRATEGY
The Company's objective is to become a "hypergrowth" company
providing high quality Internet business solutions to corporate clients.
Among other things, the Company's strategy to achieve its objective includes
(i) diversifying its product line through the continued introduction of new
technology in the areas of messaging and Internet services, (ii) merging, to
the extent possible, the features and functions of messaging and Internet
solutions to make the Company's products and services easier to use, (iii)
expanding and reorganizing the Company's sales force to develop vertical
value-added markets in large corporate accounts and (iv) pursuing
acquisitions and strategic alliances that will allow the Company to compete
more effectively with larger, more diversified companies and to respond more
readily to dynamic changes in the messaging and Internet services industries.
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<PAGE>
CURRENT MESSAGING AND INTERNET MARKETS
THE INTERNET
The Internet has experienced rapid growth and has developed into a
significant tool for global communications, commerce and media, enabling
millions of people to share information and transact business electronically.
International Data Corporation, a leading technology research firm ("IDC"),
estimates that there were over 51 million web users in the United States and
over 97 million worldwide at the end of 1998. IDC projects these numbers to
increase to over 135 million web users in the United States and over 319
million worldwide by the end of 2002. Internet-based businesses have emerged
to offer a variety of products and services over the Internet. Advances in
online security and payment mechanisms have also prompted more businesses and
consumers to engage in electronic commerce. IDC estimates that the value of
purchases of goods and services, excluding fund transfers and stock
transfers, on the Internet will grow from $32.4 billion worldwide in 1998 to
$425.7 billion worldwide in 2002.
TRENDS IN INTERNET MESSAGING
E-mail is the most widely adopted Internet application, ranging from
a personal messaging tool to a strategic business tool. According to
Electronic Mail & Messaging Systems, an Internet publication, there were
approximately 325 million e-mail accounts in operation at the end of 1998.
E-mail messages have increased in volume and functionality, and this trend is
expected to continue. For example, e-mail is expected to become a major
vehicle for e- commerce transactions. Forrester Research predicts that the
typical online consumer will participate in eight to ten commerce-related
exchanges via e-mail per week by 2001. The e-mail box as a locating and
delivery device has become the platform for additional applications such as
directory services, scheduling and document sharing. Furthermore, the e-mail
box can function as a central repository to receive, send, forward, organize
and prioritize voice mail, fax and e-mail messages, thus creating unified
messaging.
With continuing developments in modern technology, the various
message media are currently in the process of converging. Communication
channels are becoming interchangeable as consumers can send the same message
through e-mail, voice mail and fax. With the unification of these functions,
consumers increasingly value messaging services that are
"device-independent." Consumers appreciate the ability to send and retrieve
messages in any form and in the most convenient manner - e-mail, voice mail
or fax - with the telephone, personal computer, traditional fax machine or
through web access.
As e-mail continues to grow and a portion of fax traffic migrates to
the Internet, industry analysts are predicting rapid growth of services that
unify and simplify the messaging and communications needs of e-mail users.
IDC defines unified messaging as a "single 'in-box' for voice, e-mail and fax
messages that is accessible by both telephone and PC." IDC predicts that the
market for unified messaging will grow from approximately 90,000 unified
messaging mailboxes in 1998 to over 12.9 million boxes in 2002 in the United
States alone with each generating $20 million in unified messaging revenue
per month.
TRENDS IN FAXING
The fax machine is a valuable tool for communication for businesses
and individuals. Although e-mail traffic is growing rapidly, faxing continues
to grow because telephone rates continue to decrease and computer-based fax
facilitates broadcast fax and fax-enabled applications. IDC estimates that
worldwide fax transmissions will increase from 395 billion minutes in 1998 to
647 billion minutes in 2002. According to IDC, fax transmissions generated
estimated revenues of $92 billion in 1998 and are projected to generate $103
billion in 2002.
The transmission of faxes over the Internet has become an
increasingly popular tool and provides a low cost method to send and receive
faxes. In addition to Internet faxing, users are increasingly faxing
documents directly from their computers over traditional phone lines, thereby
growing less dependent on traditional fax machines. IDC estimates
36
<PAGE>
that the share of faxes sent using a fax machine in the United States was 82%
in 1997 and is projected to be 58% in 2002.
Recent advances in technology allow users to send and receive faxes
from their computers using e-mail to transmit data over the Internet.
Internet faxing using e-mail reduces labor costs associated with traditional
faxing by allowing users to send, receive and manage faxes from their
computers, and reduces carrier costs because of the use of the Internet
rather than telephone lines as the transmission medium.
INTERNET COMMERCE
The Company believes the worldwide Internet commerce application
market is growing at significant rates. According to IDC's Internet Commerce
Software Applications Market Review and Forecast, revenues soared 154% to
$444 million in 1998 and are expected to increase another 280% to
approximately $1.7 billion in 1999. The Company believes many companies will
be developing e-commerce sites over the next two years as e-commerce presents
vendors with sales opportunities.
The proliferation of Internet Service Providers (ISPs) has enabled
more vendors to utilize the Internet as a marketing and sales tool. As
vendors shift marketing strategies toward on-line buyers, the Company
believes they will seek single service providers who are able to meet all of
their business marketing needs, including high priority messaging, in
addition to web hosting and Internet content development.
NEED FOR COST-EFFECTIVE SOLUTIONS
The Company believes businesses are constantly seeking to
cost-effectively manage expanding and increasingly sophisticated
communications systems making it preferable for them to utilize third parties
to manage their messaging and Internet needs. Moreover, the Company believes
businesses often find it difficult to implement state-of-the-art technology
in their own infrastructure as individuals with the appropriate expertise are
scarce and costly to hire, train and retain. Consequently, the Company
believes organizations, in an effort to lower costs and reduce time-to-market
with complex technologies, will look to Internet-based solutions to outsource
non-core competencies.
The Company provides businesses convenient, cost-effective and
reliable Internet-based messaging and communications services. The Company
provides a commercially available Internet-based messaging service that
supports business fax, e-mail, voice mail, and supporting services. The
Company deploys an integrated Internet and Public Switched Telephone Network
solution based on economy and reliability. The Company also provides a host
of electronic commerce solutions as well as Internet content support and ISP
services. The Company believes that by providing a fully integrated suite of
products and services, its customers are able to minimize complexity in
messaging and e-commerce services and maximize productivity.
OPERATIONS
The Company's operations are comprised of forwarding customer
messages and delivering Internet services. The Messaging services are
customer driven using Microsoft WindowsTM based desktop client software to
electronically transfer to the Company the customer's message document and
delivery instructions (fax telephone numbers, e-mail addresses, voice mail
telephone numbers, and merge fields for personalizing the message). The
customer elects whether to transfer the document and instructions to the
Company by way of the Internet (e-mail) or direct dial (modem-to- modem)
connection. The Company receives the document and instructions in an
electronic format and automatically executes those instructions without the
necessity of human intervention. The Company's operation software connects
the delivery instructions with the customer's document, organizes the packets
of data and transmits the information to the destination telephone numbers or
e-mail addresses as designated. The Company's technical staff monitors the
job queue on a 24 hour, 7 day per week basis to ensure that the system is
efficiently delivering customer jobs. The Company's customer service staff is
available on a 24 hour, 7 day per week basis to assist customers with
questions they
37
<PAGE>
may have concerning the submission of jobs, the status of the jobs or any
problems needing resolution. After any customer job has been executed, the
customer may electronically view a detailed log showing the document delivery
status for each intended recipient.
Internet access, transmission, co-location and related Internet
services are directly handled by IXC Communications. Web site hosting
services are monitored by the Company's technical staff who are also
monitoring the messaging job queues. Other Internet services are handled by
the Company's production staff which accepts the specifications on customer
projects, interfaces with the customer and determines which of the Company's
resources are needed to meet customer requirements.
The Company's operations include Network Operations (technical staff
to monitor the servers and messaging queues), Customer Service, Engineering
(developers for custom messaging and Internet application development),
Graphics (document, web site and web content design), and Copy (writing for
document, web site and web content).
The Company uses various long distance carriers. Major
telecommunications carriers have competed and are expected to continue to
compete to obtain the Company as a customer. See "-- Competition."
Deregulation in the telecommunications industry has enabled the Company to
enter into agreements with several carriers to provide long distance service
at cost-effective rates. The Company will be required to add additional
telecommunications facilities and enhance its network infrastructure to meet
the anticipated traffic needs and maintain excess capacity to accommodate
expected increases in demand for its services.
The Company has developed safeguards to minimize the impact of power
outages and other operational problems. It has installed power backup systems
at its computer center in Houston, Texas, and all network locations
throughout the U.S. to provide an uninterrupted power supply in the event of
a disruption in local utility services. The Company has not suffered any
material interruption in its business due to power outages or similar
problems. As the Company grows, it intends to add another primary computer
center hub for back-up and expansion.
CYNET SERVICES
FAX BROADCAST
HYPERCAST is the Company's automated fax broadcasting service. It
allows the Company's customers to mass-distribute business documents over
broad geographical areas in specified periods of time. After the customer
submits a batch order for a broadcast, the Company's system automatically
generates and delivers a complete report that details information about the
order, such as destination cities, area codes, number of pages and all costs
associated with transmission. After the Company has completed the broadcast,
customers can access a detailed report, which can be used for monitoring
results, updating phone lists and other external applications.
POINT TO POINT FAX
HYPERLINE is the Company's point-to-point enhanced fax service. This
service allows customers to fax directly from their desktops to recipients
utilizing the Company's system. HYPERLINE can be fully customized to each
customer's individual faxing needs. The features include (i) customized cover
pages, (ii) implemented accounting codes, (iii) development of a control
center that maintains and manages faxes, (iv) delivery and non-delivery
reports via e-mail, and (v) daily journal production.
38
<PAGE>
FAX TO E-MAIL
HYPERMAIL is the Company's fax-to-email service, which provides
customers an automated, easy-to-use desktop solution that interfaces with
most Internet e-mail services. This service is ideal for professionals
performing high-volume sales and marketing operations or operating inbound
call centers. HYPERMAIL customers are assigned a toll-free or local virtual
fax number which is linked to their e-mail address as well as the Company's
fax viewer software. The HYPERMAIL program receives inbound faxes and sends
them directly to the customer's desktop as e-mail. This service allows a
customer to receive, view, store, forward and print confidential inbound
faxes from any location where they have e-mail access.
INTERNET TO FAX
HYPERWEB integrates traditional e-mail with point-to-point fax
capabilities. This service allows customers to transmit high volume,
web-generated documents to other e-mail addresses, telex addresses and fax
numbers simultaneously. This service allows any merchant to do e-commerce
with or without a PC. Additionally, customers receive delivery confirmation
reports either by e-mail or fax. An added feature is the ability to include
custom logos and to insert automatic headers into outgoing messages. HYPERWEB
can also be customized for customers to assign individual billing codes and
tracking reference numbers on faxes and telexes for easy recordkeeping.
E-MAIL TO E-MAIL
WEBCAST gives customers the ability to broadcast e-mail messages to
any number of recipients simultaneously. The Company's service is unmatched
in terms of speed, having the capability to deliver approximately 200 e-mail
messages per second or 720,000 per hour. To utilize this service, the
customer simply forwards an e-mail address list to the Company. The customer
then submits a message. The Company's systems automatically broadcast the
message to the addresses electronically over the Internet. Added features of
WEBCAST are (i) the ability to attach documents, (ii) a special e-mail
address for forwarding outbound messages and (iii) delivery priority options:
InstaMail for immediate delivery or Scheduled for a specific time.
IMAGE RESOLUTION/DOCUMENT ENHANCEMENT
HYPERRES is an image resolution service that can be used in
conjunction with any of the Company's messaging services. To utilize this
service, the customer submits graphics, photos, brochure layouts, catalogs
with pictures and artwork or any other type of document before transmission.
The Company's graphics technicians and engineers then enhance the document to
ensure top quality output to any receiver.
CELL/MODEM
The Company's CELL/MODEM is an all-in-one cellular phone and fax
card. Designed to fit any laptop or portable computer equipped with a PCMCIA
Type III Slot, this cellular fax card contains its own cell phone. The
CELL/MODEM also fits into a standard RJ-11 jack for landline use, thereby
completely eliminating the need for a stand-alone cellular telephone. A
miniature combination in-ear speaker and microphone allows customers to place
and receive phone calls simply and easily. The back bone of VIRTUAL OFFICE,
the Company's bundled hardware and software product, CELL/MODEM can be used
to access the Internet, exchange important data, send and receive e-mail,
retrieve voice mail, send and receive faxes, and make phone calls from any
place at any time.
39
<PAGE>
VOICE BROADCAST
The Company's TELECAST service gives customers voice broadcast
capabilities without having to navigate through various types of telephone
PBX systems. Once an account has been established, the customer is given a
toll free access number to call to record a message for broadcast. The
customer then submits name and voice number lists in digital format to
schedule the broadcast delivery time. The Company's live operators navigate
the requisite auto-attendant systems and drop the messages into the voice
mail boxes the customer specifies. This service results in a 90% delivery
rate.
VOICE TELECONFERENCING
HYPERCOMM offers two distinct conference-calling services. The first
service, "Meet Me," is a conference call scheduling service. Customers
provide to the Company the names and numbers of all parties desired for a
conference call and the Company's live operators relay the date, time and
call-in phone number to all specified parties before the scheduled date. The
second service, "Dial Out," allows customers to have the Company's operators
dial out and connect all parties at the scheduled meeting time. These
services are ideal for business, medical, educational and political
organizations that frequently engage in conference calls.
ISP SERVICES
The Company offers full-service ISP capabilities, providing its
business customers with Internet connectivity in addition to e-commerce and
messaging services. This service includes 150 hours of monthly usage, 56K
Flex and X2 modem support, 24-hour technical support, national ISDN access,
800 number access while traveling away from home or office territory,
personalized home page service, 6MB of storage for e-mail messages and web
site content, one e-mail account, online news services and online viewing of
monthly usage.
INTERNET SOLUTIONS
As a result of the acquisition of Cynet Interactive, the Company
provides its customers with advanced Internet solutions, including web
content, graphic and copy design, application development and web hosting.
The Company's current Internet projects include on-line shopping malls,
integrated procurement centers, live auctions and Internet Web- based
magazines.
MARKETING SOLUTIONS
Worldwide Marketing Services is a subsidiary of the Company.
Worldwide specializes in providing verified list, graphics and copy writing
services. The list services are expansive and may be ordered to fill simple
marketing specifications or highly customized requirements for sophisticated
clients requiring specialized data. Worldwide's services include corporate
logo design, brochures, letterhead and stationery design and a variety of
related items.
EQUIPMENT SAFEGUARDS AND SUPPLIERS
The success of the Company is largely dependent upon the efficient
and uninterrupted operation of its messaging and Internet system
infrastructure. Within 120 days from the date of this Prospectus, the Company
will have in place a disaster recovery plan with a redundant network
switching center. The Company's systems and operations are vulnerable to
damage or interruption from fire, earthquake or other natural disaster and
from power loss, telecommunications failure, break-ins and similar events.
Furthermore, the hardware, software and network systems developed by the
Company are relatively new and, therefore have not withstood the demands of
the larger volume associated with the Company's revenue projections. See
"Risk Factors -- Company System Failure." Substantially all of the Company's
computing equipment is readily available from large, well-known suppliers.
40
<PAGE>
CUSTOMERS
Historically, the Company's customers consisted of small and
medium-sized businesses with messaging services needs. Those customers
purchased messaging products and services from the Company pursuant to
specific purchase orders and other short-term arrangements. Presently, the
Company targets medium-sized to large corporate clients, establishing
customer relationships with Fortune 500 and middle tier companies seeking
full service Internet business solutions. Although the Company actively
pursues long term contracts with its present customers and prospects, no
single customer accounted for more than 4% of the Company's revenues during
1998 or during the six months ended June 30, 1999.
SALES AND MARKETING
From inception through 1997, the Company marketed its products and
services almost exclusively through a telephone sales program. The basis of
the Company's marketing strategy was price-based selling and the Company
sought to acquire customers by providing the lowest cost service in the
messaging industry. Beginning in 1998, the Company underwent a fundamental
shift away from price-based selling to solution-based selling and increased
its offerings to include more value-added services.
To enhance the promotion and sale of its solution-based suite of
products and services, the Company has expanded and reorganized its sales
force during 1999 with the goal of developing and maintaining a professional
sales team consisting of individuals with specialized and technical
knowledge. As of August 31, 1999, the Company employed a team of 42 sales
and support personnel in its Houston office, six in its Yorba Linda,
California location and four in Portland, Oregon. The Company's sales
personnel are trained to target large and middle tier corporate accounts with
the charge to build vertical value-added markets for the Company's
Internet-based products and services.
The Company expects to continue to employ significant telephone
contact as part of its marketing efforts. In addition, the Company now
engages, and expects to continue to engage, in more direct contact with
customers and prospects. The Company also actively seeks to forge major
strategic alliances to enable the Company to market its products and services
through alternate distribution channels. The Company expects to include, as
part of its marketing campaign (i) advertisements in trade journals,
(ii) television and radio promotions, (iii) concentrated marketing through
large reseller channels, (iv) Internet-based advertising and promotions,
(v) Internet business solutions seminars and (vi) participation in trade shows.
STRATEGIC RELATIONSHIPS
The Company is actively pursing strategic relationships that the
Company expects will complement its existing services or increase the amount
and variety of services it currently offers. The service providers with whom
the Company engages in strategic transactions generally have pre-existing
relationships with their customers who, typically, require messaging and
Internet services the Company provides. Consequently, the Company expects
these strategic relationships will provide the Company with access to likely
consumers for its services.
The following is a summary of certain of the strategic relationships
which the Company has established or is currently pursuing. All strategic
transactions into which the Company enters are subject to a variety of risks
and conditions, including conditions beyond the Company's control.
Furthermore, most of these relationships are in the early stages of
development and have not been finalized. Although the Company believes that
individually none of these relationships is material to its business, the
Company considers its strategic alliances in their entirety to be important
to future success. See "Risk Factors -- Risks Associated With Acquisitions,
Investments and Strategic Alliances."
BROOKTROUT TECHNOLOGY, INC. ("BROOKTROUT"). The Company is
currently conducting certain joint marketing and technology sharing efforts
with Brooktrout. The Company expects that (i) the Company and Brooktrout will
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synergize marketing efforts at trade shows, (ii) the Company will continue to
be a Beta Testing customer for new Brooktrout technology pertaining to
faxing, unified messaging and other related technology, and (iii) the Company
and Brooktrout will have regular joint technology round table discussions
with their respective research and development, engineering and software
development teams, which discussions could result in additional technology
agreements and understandings.
TELESYSTEMS MARKETING, INC. ("TELESYSTEMS"). The Company has entered
into a joint marketing alliance with Telesystems, pursuant to which
Telesystems provides its e-mail broadcast, voice broadcast and conference
calling to the Company for resale under the Company's private brand. In
consideration for the foregoing, the Company provides Telesystems its full
suite of messaging products for resale. The agreement also provides for the
mutual promotion and marketing of respective products and services.
IXC COMMUNICATIONS. IXC Communications currently provides Internet
access to the Company's business customers. In August 1999, the Company
entered into a Strategic Alliance Agreement with IXC Communications providing
a framework under which the Company and IXC Communications can complete
additional collaboration projects. In addition to providing Internet access,
the Company expects IXC Communications will provide web hosting, co-location,
bandwidth and related products and services to the Company for resale under
the Company's private brand. The Company also expects IXC Communications will
utilize its approximately 300 salespersons in the promotion and resale of the
Company's products and services.
COMPETITION
The market and demand for business-to-business messaging services
and Internet application services is highly competitive and growing rapidly
and the Company faces a high degree of competition in each of its service
areas. The Company believes there are no dominant market leaders in the
industries in which the Company competes. The Company's ability to compete
successfully depends on a number of factors, including (i) market presence,
(ii) the capacity, reliability and security of the Company's network
infrastructure, (iii) the pricing policies of the Company's competitors and
suppliers, (iv) the timing of the introduction of new services and service
enhancements, and (v) how the industry responds to general economic trends.
Due to the changing messaging industry and the explosive growth in the
Internet services industry, the Company is unable to identify direct competitors
except with respect to the Company's specific product and service offerings. The
Company's current and potential competitors fall into the following categories:
(1) Telecommunications companies and resellers (e.g., AT&T, MCI
Worldcom);
(2) Internet Service Providers (e.g., Uunet Technologies, NETCOM
On-Line Communications Services, Inc.);
(3) Enhanced fax service providers (e.g., Netmoves (formerly FaxSav,
Inc.), Premiere Technologies, Inc.);
(4) Unified Internet messaging providers (Jfax.com. FaxNet Corp.); and
(5) Various web design and electronic commerce service providers.
The Company is unaware of any other entity that combines Messaging
and Internet products and services in a unified service offering as does the
Company. Nevertheless, the Company believes that its current business
strategy will be emulated by competitors in the future and such competitors
will enter the markets served by the Company. Some of those competitors may
possess significantly greater financial, marketing, technical and other
resources than the Company. However, the Company believes its software and
product development and sales approach distinguishes it from its competitors.
The Company's internal software development team enables it to develop and
introduce new products and react to changes in customer requirements more
quickly than many of its competitors. In addition, the Company offers pricing
policies that result in competitive cost-saving solutions for its customers.
The Company's sales personnel are trained to utilize selling techniques aimed
at specific customer needs.
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Although the Company will continue to offer competitive products and
services and seek to maintain and enlarge its market share, there can be no
assurance that additional competitors will not enter markets that the Company
plans to serve or that the Company will be able to compete successfully.
Increased competition may result in price reductions, reduced gross margins
or erosion of the Company's market share, any of which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
GOVERNMENT REGULATIONS
The telecommunications industry is subject to regulation by the FCC,
by various state public service and public utility commissions and by various
international regulatory authorities. The FCC has the power to impose
regulatory requirements on the Company and currently classifies the Company
as a "nondominant carrier." Generally, the FCC has chosen not to closely
regulate the charges or practices of nondominant carriers. The FCC also has
the power to impose more stringent regulatory requirements on the Company and
to change its regulatory classification. As a result, there can be no
assurance that the FCC will not change the Company's regulatory
classification or otherwise subject the Company to more burdensome regulatory
requirements that would have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company is subject to federal and state laws regulating the
unsolicited transmission of fax and e-mail transmissions for advertisement
purposes. The Company has adopted a policy to refrain from transmitting fax
and e-mail advertisements except to its customers and other recipients who
have expressed an interest in receiving the transmitted information or
otherwise have given their permission to receive such transmissions. The
Company encourages its customers to familiarize themselves with the relevant
laws and to conduct their businesses in accordance with applicable laws.
Nevertheless, the Company believes it is not responsible or liable for
customer transmissions in violation of governmental regulations.
In connection with its anticipated international operations, the
Company may be required to satisfy a variety of foreign regulatory
requirements. The Company intends to explore and seek to comply with these
requirements on a country-by-country basis. There can be no assurance that
the Company will be able to satisfy the regulatory requirements in foreign
countries and the failure to satisfy such requirements may prevent the
Company from operating in such countries. The failure to comply with foreign
regulatory requirements could have a material adverse effect on the Company's
business, financial conditions and results of operations.
EMPLOYEES
As of August 31, 1999, the Company employed 119 persons, substantially
all of whom are full-time employees, and none of whom are now covered by a
collective bargaining arrangement. The majority of the Company's employees
are located at the Company's headquarters in Houston, Texas. The Company also
has employees in Yorba Linda, California and Portland, Oregon. The Company
considers its relationships with its employees to be satisfactory.
INTELLECTUAL PROPERTY
The Company currently holds no United States or foreign patents. The
Company has registered the trademark names CYNET, HYPERCAST and HYPERLINE in
the United States. The Company regards certain of its computer software as
proprietary and seeks to protect such software with common law copyrights,
trade secret laws, non-disclosure agreements and other safeguards. There can
be no assurance, however, that the steps taken by the Company to protect its
proprietary rights will be adequate or that others will not independently
develop technologies similar or superior to the Company, or obtain access to
the Company's know-how or software codes, concepts, ideas or documentation.
Further, there can be no assurance that the Company's non-disclosure
agreements with its employees will adequately protect the Company's trade
secrets.
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PROPERTIES
The Company does not own any real property. The Company's
headquarters facility, which includes its administrative, sales, marketing,
management information systems and development offices and its operations
center, is located in approximately 21,000 square feet of leased space in
Houston, Texas. The lease on the Houston facility expires in March 2000. The
Company also has approximately 1,000 square feet of leased space in Yorba
Linda, California and 900 square feet of leased space in Portland, Oregon.
The Company believes its existing facilities are adequate to meet current
requirements and that suitable additional space in close proximity to its
headquarters will be available as needed to accommodate growth of its
operations.
INSURANCE
The Company maintains insurance covering risks incurred in the
ordinary course of business, including general liability, special and
business property coverage (including coverage of electronic data processing
equipment and media), and business interruption insurance. The Company
believes its insurance coverage is adequate.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which the
Company believes could have a material adverse effect on the Company. From
time to time the Company becomes involved in complaints related to the
distribution of unsolicited faxes for a customer of the Company. The
distribution of unsolicited faxes is subject to restriction under federal law
and some state laws. The Company has developed procedures designed to
minimize its exposure to claims of this type. The Company may have rescission
liability in connection with the sales of the Subject Securities. See
"Rescission Offer."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results
of operations of the Company for the years ended December 31, 1998 and 1997
and the six months ended June 30, 1999 and 1998. It should be read in
conjunction with "Selected Financial Information" and the financial
statements and the notes thereto included elsewhere in this Prospectus. The
following information contains forward-looking statements. For a discussion
of certain limitations inherent in such statements, see "Risk Factors --
Forward-Looking Statements."
OVERVIEW
The Company has committed significant resources in developing and
enhancing its messaging and Internet technologies. From the Company's
inception through early 1996, the Company obtained approximately $1.9 million
of start-up capital to develop its fax broadcasting network and install nodes
in selected locations throughout the United States. Between August 1996 and
December 31, 1997, the Company obtained additional capital in the amount of
approximately $15.3 million which includes $14,198,137 from the issuance or
sale of the Subject Securities, in order to, among other things, improve the
network, develop new products and services, expand its marketing and sales
efforts, invest in capital expenditures and satisfy its working capital
requirements. The sale of the Subject Securities created potential securities
law liabilities which resulted in the Company's need to make the Rescission
Offer. Since December 1997, Cynet Holdings has contributed additional capital
by way of cash infusions in the amount of $4,106,000 in exchange for the
issuance of 4,106,000 shares of the Company's Class A Common Stock. In
addition, Cynet Holdings transferred all of the outstanding membership
interests of Cynet Interactive to the Company. See "Management -- Certain
Transactions."
While undergoing rapid development and internal expansion, the
Company experienced weak and deteriorating financial performance, which was
further hampered by the need to conduct the Rescission Offer. In January
1998, the Company underwent a change of control and management. The new
management team substantially improved the Company's financial performance,
diversified the Company's products and services and reorganized and expanded
the Company's sales efforts. In 1999, the Company transitioned itself from a
messaging company (delivering fax, e-mail, voice and data between businesses)
to an Internet solutions provider incorporating full messaging and Internet
capabilities.
The Company derives its operating revenues from providing messaging
and Internet services to business customers. Although the Company generally
does not have long-term contractual service agreements with its customers,
the Company believes its superior delivery and customer service encourages
its customers to continue using the Company's products and services. As a
result, the Company expects its operating results will benefit from recurring
monthly revenues and transaction fees from such customers. The Company also
receives revenues from the sale of its specialized software to its customers.
STATE OF THE COMPANY AT THE CHANGE OF MANAGEMENT
From its inception until the January 28, 1998 change of management,
the Company was a fax broadcast service provider that developed its own
client interface software featuring ease of use and expanded connectivity.
The Company provided its client interface software free of charge and the
Company's service offerings were discounted below its competitors' prices.
The Company projected the image of a technology leader in fax broadcasting
with the lowest price for delivery. The Company incurred heavy losses each
year of operation because of its commodity pricing strategy coupled with the
ordinary and usual start-up, administrative, sales, marketing and development
costs. The Company prematurely expended its available capital, leaving the
Company in substantial debt to its trade vendors. In January 1998, the
Company was in poor financial condition and its working capital deficits
raised serious doubts about the Company's ability to continue as a going
concern. The Company required a substantial investment in research and
development and capital equipment to stabilize the fax broadcasting system,
lower operating costs, and diversify the product and service lines to keep
pace with industry and market changes. The Company needed a professional
management team capable
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of executing a turnaround strategy transitioning it from a start-up to a
hypergrowth company. In addition, the Company's potential securities law
liabilities effectively prevented the Company from attracting institutional
investors. In effect, the Company's business life cycle was headed to an
abrupt end.
In 1997, the year preceding a change in management, the Company's
financial performance was as follows: (i) revenues of $4,960,355, (ii) gross
margins of 9%, (iii) pre-tax net loss of $7,762,863 and (iv) cash flow
(EBITDA and other non-cash non-recurring expenses) losses of $6,850,078. In
December 1997, the Company had more than 850 shareholders and approximately
26.8 million shares issued (calculated on a fully diluted basis giving effect
to outstanding warrants); the financial condition of the business had
deteriorated and the Company had more than $14,000,000 in potential
rescission liability.
WHAT NEW MANAGEMENT ACCOMPLISHED IN 1998
Pursuant to an agreement with the Company's founder, then Chief
Executive Officer and major shareholder, Ray C. Davis ("Davis"), in January
1998 Cynet Holdings acquired all of Davis' ownership in the Company. As a
result, Vincent W. Beale, Sr., the President and major shareholder of Cynet
Holdings assumed control of the management of the Company. Mr. Beale
immediately installed a professional management team that included, among
others, Bernard B. Beale as Executive Vice President, Samuel C. Beale as Vice
President and General Counsel, and David R. Hearon, Jr. as Vice President of
Operations. In August 1998, R. Greg Smith joined the management team as the
Chief Financial Officer. See "Management." The management team's immediate
tasks were (i) to reduce operating losses, (ii) assess the true state of the
Company, (iii) identify the necessary steps to rebuild the Company, (iv) turn
the Company toward profitability and a more competitive position, (v) resolve
the rescission liability issue, and (vi) take the Company into the public
capital markets in order to fuel growth and enhance shareholder value.
With limited resources, the management team increased the Company's
revenues by 80% from $4,960,355 in 1997 to $8,947,732 in 1998. Cost of
revenues were decreased such that gross margins increased from 9% in 1997 to
32% in 1998 with each calendar quarter showing a significant improvement over
the preceding quarter. Pre-tax net losses were reduced from $7,762,863 in
1997 to $4,396,883 in 1998. Cash flow losses were reduced from $6,850,078 in
1997 to $3,251,857 in 1998. The Company's base product and service (fax
broadcasting) was stabilized and greatly improved, products and services were
diversified from one product and service in 1997 to more than a dozen
products and services in 1998 covering a complete range of messaging
solutions. The Company raised its prices as it created more value-added
services, reconstructed its client base to include larger and more successful
clients, and changed from commodity priced selling to solution selling of
value-added products and services. Cynet Holdings infused $1,511,000 cash
into the Company's capital. The Company filed its initial registration
statement with the SEC to begin the final part of the complete turnaround of
the Company. In 1998, the Company was unable to attract a significant
financial partner while in the shadow of the 1997 financial performance and
under the cloud of the potential rescission liability.
WHAT MANAGEMENT HAS ACCOMPLISHED TO DATE IN 1999
In 1999, the Company expects its financial performance to continue
to improve as compared to its 1998 performance. Specifically, the Company
expects to achieve continued improvements in its revenues, gross margins,
cash flow and net income. Toward that end, the Company achieved a 7% increase
in its revenues in the six months ended June 30, 1999 as compared to the six
months ended June 30, 1998. More importantly, the Company's gross margins
increased to 49% for the six months ended June 30, 1999 from 27% for the six
months ended June 30, 1998. The Company's projected performance improvements
are based upon realizing the benefits of the 1998 improvements in the
business, the transition of the Company from a fax company to an Internet
services company with a full complement of messaging and Internet solutions,
the expansion of strategic alliance partners, the reorganization of the sales
force, and the change in marketing strategy. Nevertheless, there can be no
assurance that the Company will be able to achieve its performance objectives.
The factors contributing to the Company's current success are the
trends in the Internet services and telecommunications industries.
Deregulations in the telecommunications industry have spawned numerous
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telecommunications providers delivering parts of the overall
telecommunications solution (local telephone, long distance telephone, mobile
telephone, data transmission, Internet access, web hosting and web content).
Business customers find this multiplicity to be inefficient and confusing.
The Company's strategy is to position itself as a one-stop-shop for the
messaging and Internet services solutions. It proposes to coordinate the
delivery and support these diverse but related services through a series of
seamless strategic alliances connecting through the Company's core products
and services. The Company's sales efforts are being refocused to target large
corporate (and Fortune 500) and medium-sized companies with a unified service
solution. This sales effort should be further enhanced by the vertical market
segmentation of the Company's sales force. With a vertical market focused
sales force, the Company expects to better interface with a number of
strategic alliance and reseller agent sales persons who sell the Company's
products and services. See "Business -- Strategic Relationships."
FUTURE PLANS AND PROSPECTS
The Company expects to expand existing alliances and form new
alliances that will enable the Company to (i) increase revenues, (ii)
continue to expand and diversify products and services to meet market demand,
(iii) accelerate research and development to deploy new technology and (iv)
increase financial resources to execute the Company's merger and acquisition
plans. In future public offerings, the Company expects to finance its growth
and expansion plans such that the Company becomes a hypergrowth company.
However, there can be no assurance that the Company will be able to realize
these plans and objectives.
CERTAIN ACCOUNTING POLICIES
Revenues from messaging and Internet services are recognized as
services are performed. Revenues from sales of customer lists and other
related services are recognized when the list is provided, or the other
services are performed. Expenditures for research and development of
telecommunication technology as it relates to messaging and Internet
application services needs are charged to expense as incurred. For the years
ended December 31, 1998 and 1997, research and development expenditures were
approximately $398,000 and $419,000, respectively.
Deferred taxes result from temporary differences between the
financial statement and income tax bases of assets and liabilities. The
Company adjusts the deferred tax asset valuation allowance based on judgments
as to future realization of the deferred tax benefits supported by
demonstrated trends in the Company's operating results.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 requires the Company to recognize all derivatives contracts
as either assets or liabilities in the balance sheet and to measure them at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Historically, the Company has not entered into derivatives
contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard on
January 1, 2001 to affect its financial statements.
Effective for all fiscal years beginning after December 31, 1998,
SOP 98-5, "Reporting on the Costs of Start-up Activities," requires all
start-up and organizational costs to be expensed as incurred. It also
requires all remaining historically capitalized amounts of these costs
existing at the date of adoption to be expensed and reported as the
cumulative effect of a change in accounting principles. The Company adopted
SOP 98-5 in the first quarter of 1999 and it did not have a material effect
on its financial statements.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30,1999 COMPARED TO SIX MONTHS ENDED JUNE 30,1998
Revenues increased to $4,534,254 for the six months June 30, 1999
from $4,243,585 for the six months ended June 30,1998. The increase of
$290,669 or 7% was due primarily to an increase in sales of the Company's
list and database services product offering.
Cost of revenues decreased to $2,322,766 for the six months ended
June 30,1999 from $3,092,689 for the six months ended June 30,1998. The
decrease of $769,923 or 25% was attributable primarily to the decrease in
telephone charges resulting from more advantageous pricing from the Company's
primary telephone carriers. Gross margin increased to 49% for the six months
ended June 30,1999 from 27% for the six months ended June 30,1998 due to the
decrease in telecommunication costs. Management expects additional telephone
rate reductions along with the delivery of higher gross margin value added
products and services to further improve gross margins.
Selling, and general and administrative expenses increased to
$2,937,633 for the six months ended June 30, 1999 from $2,564,922 for the six
months ended June 30, 1998. The increase was attributable primarily due to an
increase in personnel costs from an expansion of the Company's sales force.
Depreciation and amortization increased to $473,118 for the six
months ended June 30,1999 from $423,548 for the six months ended June
30,1998. The increase was attributable primarily to additional equipment
acquired in 1998 and early 1999, including equipment acquired in the
expansion of the Company's messaging infrastructure.
Other expense totaled $128,780 for the six months ended June 30,
1999 compared to other income of $2,502 for the six months ended June 30,
1998. The increase in other expense was primarily attributable to (i)
interest expense of $76,548 on a revolving accounts receivable lending
agreement, and (ii) a loss on disposal of certain assets totaling $50,176.
The Company had a net loss of $1,328,043 for the six months ended
June 30,1999 compared to a net loss of $1,835,072 for the six months ended
June 30,1998. The decrease in net loss is due to the factors discussed above.
Net loss per common share decreased to $0.05 from $0.08 for the six
months ended June 30,1999 compared to the six months ended June 30,1998.
YEAR ENDED DECEMBER 31,1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues increased to $8,947,732 for the year ended December 31,
1998 from $4,960,355 for the year ended December 31, 1997. The increase of
$3,987,377 or 80% was primarily attributable to (i) market share gains for
the Company's messaging products, (ii) increased customer awareness and
expansion of the size of the customer base, (iii) expansion of the Company's
sales force and (iv) the introduction of the Company's lists and database
services product offerings.
Cost of revenues increased to $6,069,184 for the year ended December
31, 1998 from $4,490,505 for the year ended December 31, 1997. The cost of
revenues as a percentage of revenues decreased to 68% for the period ended
December 31, 1998 as compared to 91% for the period ended December 31, 1997.
The decrease in cost of revenues as a percentage of revenues was primarily
attributable to (i) a decrease in the Company's telecommunications rates,
(ii) more favorable pricing of the Company's products resulting from value
added services, (iii) introduction of ancillary messaging products yielding
higher gross margins, (iv) increased efficiency gains resulting from a
implementation of new communications technologies and (v) fixed costs being
spread over a larger revenue base.
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Selling, and general and administrative expenses decreased to
$6,107,978 for the year ended December 31, 1998 from $7,517,935 for the year
ended December 31, 1997. The decrease in expenses was primarily attributable
to (i) a reduction of the Company's advertising and promotional costs of
approximately $1,100,000, (ii) a reduction of external consulting fees of
approximately $1,000,000, (iii) a reduction of the Company's legal and
accounting fees of approximately $100,000, (iv) increases in personnel costs
of approximately $600,000, and (v) increases in bad debt expenses of
approximately $100,000.
Depreciation and amortization increased to $728,975 for the year
ended December 31, 1998 from $414,652 for the year ended December 31, 1997.
The increase was attributable primarily to additional equipment acquired in
1997, including equipment acquired in the expansion of the Company's
messaging infrastructure.
Impairment loss on long lived assets decreased to $271,957 for the
year ended December 31, 1998 from $496,133 for the year ended December 31,
1997. In the third quarter of 1998, the Company under its new management,
reviewed its operations and equipment and determined certain computer
equipment was not being used in the operations of the business prior to
December 31, 1997, and had no salvage value. Accordingly, the Company
restated its 1997 financial statements and wrote off $496,133 of computer and
telephone equipment during the year ended December 31, 1997. During 1998, the
Company acquired telecommunications equipment that is more efficient and has
a higher fax transmission capacity than certain of its existing equipment.
The Company determined that its nodes, which is primarily computer equipment
that is located in various cities throughout the United States, were cost
prohibitive. The computer equipment from the nodes was implemented in the
Company's operations to the extent possible. Accordingly, the Company
recorded a write-down of property and equipment of $163,079 for the year
ended December 31, 1998 for property and equipment that is not currently
being utilized.
In addition, during 1998 the Company wrote-down certain art work and
artifacts to their estimated market value based on an independent appraisal
and recorded an impairment loss of $108,878.
Other expense totaled $126,278 for the year ended December 31, 1998
compared to other income of $56,821 for the year ended December 31, 1997. The
increase in other expense was primarily attributable to (i) interest expense
of $66,877 on a revolving accounts receivable lending agreement and (ii) a
reduction of interest income totaling $64,532.
Minority interest in net loss of consolidated subsidiaries decreased
to zero for the year ended December 31, 1998 compared to $139,186 for the
year ended December 31, 1997 due to the Company acquiring the minority
interest in the LLCs in December 1997. See Note 7 in the Notes to the
Consolidated Financial Statements.
The Company incurred a net loss of $4,356,640 for the year ended
December 31, 1998 compared to a net loss of $7,762,863 for the year ended
December 31, 1997. The decrease in net loss was due to the factors discussed
above.
Net loss per common share decreased to $0.19 from $0.60 for the year
ended December 31, 1998 compared to the year ended December 31, 1997.
The Company may in the future experience significant fluctuations in
its results of operations. Such fluctuations may result in volatility in the
price and/or value of the Company's common stock if any market develops.
Results of operations may fluctuate as a result of a variety of factors,
including the demand for the Company's services, the introduction of new
services and service enhancements by the Company or its competitors, market
acceptance of new services, the mix of revenues between Internet-based versus
telephony-based delivery, the timing of significant marketing programs, the
number and timing of hiring of additional personnel, competitive conditions
in the industry and general economic conditions. Shortfalls in revenues may
adversely and disproportionately affect the Company's results of operations
because a high percentage of the Company's operating expenses are relatively
fixed. Accordingly, the Company believes that period to period comparisons of
results of operations are not necessarily meaningful and should not be relied
upon as an indication of future results of operations. There can be no
assurance that the Company will be profitable or that the Company's operating
results will meet management's current expectations.
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LIQUIDITY AND CAPITAL RESOURCES
From its inception, the Company has financed its operations and
expansion primarily through funds raised through the formation of LLCs
(approximately $1.9 million) and a series of private offerings (approximately
$15.3 million). At June 30, 1999, the Company had a cash position of $120,018
and a working capital position of $368,901, which includes the $2,078,825 of
deferred offering costs. See Note 3 in the Notes to the Consolidated
Financial Statements.
Net cash used in operating activities was $1,783,793 and $7,624,801
for the years ended December 31, 1998 and 1997, respectively. The decrease in
net cash used in operating activities for the year ended December 31, 1998
was primarily due to a reduction in the net operating loss of the Company.
Net cash used in operating activities was $2,019,309 and $647,380 for the
six-month periods ended June 30, 1999 and 1998, respectively. The increase
in net cash used in operations for the six-month period ended June 30, 1999
was primarily due to the reduction in accounts payable and accrued expenses
totaling $1,037,587.
Net cash used in investment activities was $812,585 and $3,172,458
for the years ended December 31, 1998 and 1997, respectively. Net cash used
in investment activities was $130,680 and $386,673 for the periods ended June
30, 1999 and 1998, respectively. These amounts were due primarily to capital
expenditures for operating equipment, including computer equipment and
software, furniture and fixtures and telecommunications equipment.
Net cash provided by financing activities was $1,934,985 and
$11,169,123 for the years ended December 31, 1998 and 1997, respectively. Net
cash provided by financing activities was $2,215,000 and $470,898 for the
periods ended June 30, 1999 and 1998, respectively. The Company has obtained
financing primarily through a series of issuances of its Common and Preferred
Stock. Through the date of this prospectus, the Company has raised
approximately $21.4 million from these issuances of which $14,198,137 is
subject to the proposed Rescission Offer.
The Company's internally generated cash flows from operations have
historically been and continue to be insufficient for its cash needs. As of
December 31, 1998, the Company's sources of external and internal financing
were limited. The Company does not expect that internal sources of liquidity
will improve until additional operating revenues are generated and, until
such time, the Company will continue to rely on external sources for
liquidity. Until the Company can obtain monthly gross revenues of
approximately $1,200,000, which the Company believes would be sufficient to
fund working capital needs, there is uncertainty as to the ability of the
Company to expand its business and continue as a going concern. There is no
assurance that the current working capital will be sufficient to cover cash
requirements during that period or to bring the Company to a positive cash
flow position. In addition, lower than expected earnings resulting from
adverse economic conditions or otherwise, could restrict the Company's
ability to expand its business as planned, and, if severe enough, may shorten
the period in which the current working capital may be expected to satisfy
the Company's requirements, force curtailed operations, or cause the Company
to sell assets.
The Company currently does not have sufficient capital to meet its
cash flow requirements over the next 12 months. As a result, the Company
expects to satisfy cash flow shortages with (i) the sale of additional shares
of Class A Common Stock to Cynet Holdings pursuant to the Holdings
Subscription Agreement, (ii) the proceeds of the Rescission Financing if the
aggregate amount required to fund the Rescission Offer is less than
$5,000,000, and (iii) the proceeds of a working capital line of credit which
the Company is presently seeking with an unaffiliated lender.
The Company has reached agreements with the Rescission Underwriters
to provide the Rescission Financing to fund the Rescission Offer. The Company
has also secured a commitment from Cynet Holdings pursuant to which Holdings
will provide up to $10,000,000 ("Holdings Commitment") of equity capital to
the Company prior to December 31, 1999. As of August 31, 1999, Cynet Holdings
had contributed to the Company $4,106,000 in cash in exchange for 4,106,000
shares of the Company's Class A Common Stock. In addition, Cynet Holdings
transferred all of the outstanding membership interests in Cynet Interactive
to the Company. As of September 15, 1999, Cynet Holdings has also provided
the Company additional non-interest bearing advances totaling $277,000. See
"Management -- Certain Transactions." The proceeds from the Holdings
Commitment will be used primarily for the Company's working capital,
50
<PAGE>
expansion and acquisitions needs. The proceeds from the Rescission Financing
will be used to fund $5,000,000 of the Rescission Offer. In the event that
funds in excess of $5,000,000 are needed to fund the Rescission Offer, the
Company shall have the right to either (i) with the consent of the Rescission
Underwriters, secure additional financing through the issuance of equity
securities or the sale of assets in amounts sufficient to satisfy the
Company's rescission liabilities and complete the Rescission Offer, or (ii)
declare the entire Rescission Offer ineffective and return all completed
Elections, together with the certificates or other instruments representing
the Subject Securities, to the Offerees who accepted the Rescission Offer and
direct the escrow agent to return the funds comprising the Rescission
Financing to the Rescission Underwriters. Subject to the foregoing, any
unused proceeds of the Rescission Financing remaining after the funding of
the Rescission Offer will be used by the Company, for general corporate
purposes. See "Risk Factors -- Need for Additional Capital and Capital
Requirements" and "-- Lack of Sufficient Capital to Fund Rescission Offer;
Potential Rescission Liability" and "Use of Proceeds."
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue. The
Year 2000 issue is the result of computer programs being written using two
digits (rather than four) to define the applicable year and equipment with
time-sensitive embedded components. Any of the Company's programs that have
time-sensitive software or equipment that has time-sensitive embedded
components may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a major system failure or miscalculations.
The Company instituted a Year 2000 compliance plan and schedule in
September 1998. The Company has incorporated a compliance standard with rules
and definitions into its operations systems. The Company's compliance plan is
to ensure all of its software, hardware, information systems, products and
services are Year 2000 compatible. The Company has also structured its plan
to incorporate all identifiable vendors from whom it obtains services. In
addition to its internally developed software, the Company utilizes software,
hardware and other services from third party vendors. To the extent possible,
the Company has tested such third-party software and hardware to determine
Year 2000 compliance. In addition, the Company has received written
assurances from key vendors that their systems are Year 2000 compliant. Based
upon an initial evaluation of its broader list of vendors, the Company
believes that all of these providers are in the process of reviewing and
implementing their own Year 2000 compliance programs. The Company will work
with these providers to address the Year 2000 issue and to continue to seek
assurances that their systems are Year 2000 compliant.
As of July 1, 1999, the Company successfully completed its Year 2000
compliance test plan and determined that all of its systems are Year 2000
compliant. The Company has not incurred any significant expenses for Year
2000 remediation efforts. The Company conducted an independent audit of its
software and upgraded the bios and clocks in its hardware. The Company does
not anticipate that any future costs associated with this project will be
material. However, if the Company, its customers, its providers of hardware
and software or other third parties with whom the Company does business fail
to remedy any Year 2000 issues, the Company's services could be interrupted
and it could experience a material loss of revenues that could have a
material, adverse effect on its business, prospects, results of operations
and financial condition. The Company is unable to reasonably estimate the
duration and extent of any such interruption, or quantify the effect it may
have on future revenues.
51
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth the directors and officers of the
Company and their respective ages and positions (ages as of August 31, 1999):
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- ----------------------------------------------------
<S> <C> <C>
Vincent W. Beale, Sr. 51 Chairman of the Board, Chief Executive Officer,
President and Director
Bernard B. Beale 42 Executive Vice President and Chief Operating Officer
David R. Hearon, Jr. 62 Vice President, Chief Technical Officer
Samuel C. Beale 43 Vice President, General Counsel and Secretary
R. Greg Smith 40 Vice President, Chief Financial Officer
Wayne Schroeder 57 Director
</TABLE>
VINCENT W. BEALE, SR. was elected Chairman of the Board of
Directors, Chief Executive Officer and President of the Company on January
28, 1998. Mr. Beale acted as a consultant to the Company from June 1997 until
January 1998. Mr. Beale is the President and majority owner of Cynet
Holdings, a limited liability company which is the largest shareholder of the
Company. Mr. Beale is also the President and Managing Director of BNB
Capital, Inc., an investment banking firm. Prior to joining the Company, Mr.
Beale was employed for more than fifteen years with various investment
banking firms including Merrill Lynch, Pierce, Fenner & Smith, Inc., Kidder
Peabody & Co., Inc., PaineWebber, Inc. and Shearson Lehman Hutton, Inc.
BERNARD B. BEALE joined the Company in January 1998 as a special
consultant to the Chairman to assist in the reorganization of the Company's
business operations. In July 1998 Mr. Beale was named Executive Vice
President and Chief Operating Officer of the Company. Prior to joining the
Company, Mr. Beale was employed by The Equitable Company, a financial
services firm, and certain other investment banking firms from 1985 to 1998.
From 1979 to 1986, he was employed in various positions including accounting,
human resources and project management with Western Electric and AT&T. Mr.
Beale holds a Master of Science degree in Business Management from Aurora
University, Aurora, Illinois, and a Bachelor of Arts degree from Oakwood
College, Huntsville, Alabama.
DAVID R. HEARON, JR. was employed by the Company in March 1998 as
Vice President and Chief Technical Officer. From July 1996 until joining the
Company, Mr. Hearon was President of Hearon & Associates, an independent
consulting firm providing consulting services in the areas of information
technology, manufacturing, customer support, re-engineering and human
resource development. From 1959 to May 1996, Mr. Hearon was employed by
Lucent Technologies and its predecessors, AT&T and Western Electric, in
management positions related to telecommunications and information
technology, including engineering, manufacturing voice and data networks, and
call centers. Mr. Hearon holds a Bachelor's degree in Mechanical Engineering
from the City College of New York and has participated in post-graduate
business and engineering programs at the University of Chicago and City
College of New York.
SAMUEL C. BEALE became Vice President, General Counsel and Secretary
of the Company in May 1998. Mr. Beale was an attorney engaged in private law
practice for eight years prior to joining the Company. Prior to entering the
practice of law in November 1990, Mr. Beale spent more than ten years in the
computer industry with companies such as IBM Corporation, Sperry Univac,
Martin Marietta and IOCS, in positions ranging from systems engineer to data
processing manager to sales. Mr. Beale holds a Juris Doctor degree from the
Ohio State University College of Law and a Bachelor of Arts degree from
Harvard University.
R. GREG SMITH joined the Company in August 1998 as Vice President
and Chief Financial Officer. Mr. Smith was employed for more than 12 years in
the health care information systems industry prior to joining the Company. Mr.
52
<PAGE>
Smith was most recently employed by ADAC Healthcare Information Systems
("ADAC") as Vice President Finance and Chief Financial Officer from 1995
until joining the Company. In 1996, ADAC became the first health care
manufacturer to receive the Malcolm Baldridge National Quality Award. Prior
to joining ADAC, Mr. Smith held numerous financial management positions from
1985 through 1995 for Community Health Computing, Inc. ("CHC"), including
Vice President Finance and Chief Financial Officer from 1994 through 1995.
ADAC acquired CHC in 1995 and retained Mr. Smith as the Chief Financial
Officer for their combined health care information systems businesses. Mr.
Smith holds a Bachelor of Business Administration degree in Finance from Sam
Houston State University.
WAYNE SCHROEDER joined the Company in October 1997 as Chief
Financial Officer and Secretary and was elected to the Board of Directors in
February 1998. In April 1998 Mr. Schroeder resigned as an officer of the
Company to become the Controller of Capstar Broadcasting Corporation. Mr.
Schroeder was Vice President - Finance, Secretary and Director of Boundless
Corporation from November 1996 to October 1997. Mr. Schroeder was
self-employed as a financial and accounting consultant from June 1994 to
October 1996. From July 1987 to May 1994, Mr. Schroeder served as Chief
Operating Officer, Chief Financial Officer and a director of Arrhythmia
Research Technology, Inc. Mr. Schroeder graduated from the University of
Texas at Austin with a degree in finance and accounting.
Vincent W. Beale, Sr., Bernard B. Beale and Samuel C. Beale are
siblings. There are no other family relationships among any of the Company's
directors and executive officers.
DIRECTOR COMPENSATION
Directors who are employees or consultants of the Company do not
receive any compensation for serving as directors. All directors are
reimbursed for ordinary and necessary expenses incurred in attending any
meeting of the Board of Directors or any committee thereof or otherwise
incurred in their capacity as directors.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to all forms
of compensation paid by the Company to the named individuals for the years
ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(1) COMPENSATION
--------------------- ------ -------- ------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Vincent W. Beale, Sr. 1998 $133,693 $30,000 -- 100,000 shares --
President and Chief
Executive Officer
(since 1/98)
Ray C. Davis, President 1998 $110,287 -- -- -- $188,326(2)
and Chief Executive 1997 $198,430 $50,000 $7,500(3) -- $250,000(4)
Officer 1996 $116,923 -- -- --
(until 1/98)
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(1) COMPENSATION
--------------------- ------ -------- ------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Bernard B. Beale 1998 $131,696 -- -- 150,000 shares --
Executive Vice
President, Chief
Operating Officer
(since 1/98)
David R. Hearon, Jr. 1998 $122,226 $30,000 -- 75,000 shares --
Vice President, Chief
Technical Officer
(since 3/98)
Samuel C. Beale 1998 $ 90,845 -- -- 100,000 shares --
Vice President, General
Counsel and Secretary
(since 3/98)
Wayne Schroeder 1998 $ 40,385 -- -- 100,000 shares --
Chief Financial Officer
and Secretary
(10/97 to 4/98)
R. Greg Smith 1998 $ 42,308 -- -- 100,000 shares --
Vice President, Chief
Financial Officer
(since 8/98)
Vickroy Stone 1997 -- -- -- (5) -- --
Chief Financial Officer 1996 -- -- $617,401(6) -- --
(9/95 to 2/97)
John Kim 1997 $262,302 $ 6,000 -- -- --
Vice President, Sales 1996 $ 34,854 $31,450 -- -- --
(4/96 to 2/98)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(1) COMPENSATION
--------------------- ------ -------- ------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Keith Shaffner 1997 $9,231 -- -- -- $1,976,663(7)
Vice President
(6/97 to 11/97)
</TABLE>
- ------------------
(1) Refers to incentive stock options to purchase shares of Class A Common
Stock at a purchase price of $0.39 per share granted to Vincent W. Beale,
Sr., Bernard B. Beale, David R. Hearon, Jr., Samuel C. Beale and R. Greg
Smith under the 1997 Restated Stock Option Plan in accordance with their
respective employment agreements with the Company. (See "-- Employment
Agreements" and "-- Stock Option Plan" below).
(2) Represents (i) a $121,043 account receivable owed by Mr. Davis to the
Company which was forgiven in exchange for the termination of Mr. Davis'
employment agreement pursuant to the Settlement Agreement and Mutual
Release in Full executed between the Company and Mr. Davis. See
"--Employment Agreements" below and (ii) $67,283 of property transferred
to Mr. Davis as compensation for services rendered. See "-- Certain
Transactions."
(3) Represents the value of providing Mr. Davis the use of an automobile
owned by the Company.
(4) Represents consideration paid to Mr. Davis in exchange for his assignment
to the Company of all of his "intellectual property." See "-- Certain
Transactions."
(5) Excludes (i) the repurchase by the Company of 450,000 shares of Class A
Common Stock from Mr. Stone for $450,000 and (ii) the issuance of
warrants to purchase 450,000 shares of Class A Common Stock which were
deemed to have no value on the date of issuance. See "-- Certain
Transactions."
(6) Represents $117,401 paid and 500,000 shares of Class A Common Stock,
valued at $500,000, issued to Mr. Stone for financial advisory services
rendered. See "-- Certain Transactions."
(7) Represents $1,005,136 paid to Mr. Shaffner individually and $971,527 paid
to his affiliate, CyFax, Inc. See "-- Certain Transactions."
No other director or executive officer received salary and bonus which
exceeded $100,000 during any of the three fiscal years ended December 31, 1998.
See "-- Employment Agreements" below for information regarding the current
compensation of certain of the Company's directors and officers.
55
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARs EMPLOYEES IN FISCAL EXERCISE OF
NAME GRANTED (1) YEAR BASE PRICE EXPIRATION DATE
------ ------------- ----- --------------- -------------------
<S> <C> <C> <C>
Vincent W. Beale, Sr. 100,000 shares 6.8% $0.39 per share January 31, 2003
Bernard B. Beale 150,000 shares 10.2% $0.39 per share July 21, 2003
David C. Hearon, Jr. 75,000 shares 5.1% $0.39 per share February 28, 2003
Samuel C. Beale 100,000 shares 6.8% $0.39 per share July 21, 2003
Wayne Schroeder 100,000 shares 6.8% $0.39 per share March 31, 2003
R. Greg Smith 100,000 shares 6.8% $0.39 per share August 25, 2003
</TABLE>
- --------------
(1) See "-- Employment Agreements" for information regarding the vesting
of these options. Mr. Schroeder's options are 100% vested as of the
date granted.
None of the Company's executive officers exercised any options
during the fiscal year ended December 31, 1998. The Company has not issued
any SARs during the fiscal year ended December 31, 1998.
None of the Company's executive officers were granted awards under
any long-term incentive plan during the fiscal year ended December 31, 1998.
EMPLOYMENT AGREEMENTS
On June 17, 1997, the Company entered into a Consulting Agreement
with Vincent W. Beale, Sr., pursuant to which Mr. Beale agreed to assist the
Company with respect to an initial public offering and certain proposed
mergers and acquisitions. Mr. Beale was paid an aggregate of $189,000 in
consulting fees under the terms of the Consulting Agreement.
Effective February 1, 1998, the Company terminated his Consulting
Agreement and entered into an employment agreement with Vincent W. Beale, Sr.
pursuant to which Mr. Beale serves as the Chairman of the Board and Chief
Executive Officer of the Company. The agreement has an initial term of five
years and can continue for additional one-year periods upon the agreement of
Mr. Beale and the Company, and requires Mr. Beale to devote substantially all
of his business time, attention and energy exclusively to the business of the
Company, and to use his best efforts to promote the success of the Company's
business. In exchange, Mr. Beale is entitled to (i) receive an annual salary,
commencing February 1, 1998, of $180,000 (subject to annual review by the
Board of Directors), (ii) earn an incentive bonus in accordance with the
Company's bonus plan to be established for its executives, (iii) receive a
signing bonus of $30,000, (iv) an option under the Company's 1997 Amended and
Restated Stock Option Plan to purchase 100,000 shares of Class A Common Stock
at a price of $0.39 per share which vests immediately when granted and (v)
participate in the Company's other employee benefit plans. Mr. Beale's
employment agreement is terminable by the Company at any time for "cause," as
specified in the agreement, and in certain other events. The employment
agreement also contains covenants limiting Mr. Beale's right to compete with
the Company during the term of the employment agreement and for two years
after the termination of his employment.
Effective March 1, 1998, the Company entered into an employment
agreement with David R. Hearon, Jr. pursuant to which Mr. Hearon serves as
the Vice President of Operations of the Company. The agreement has an initial
term of four years and can continue for additional one-year periods upon the
agreement of Mr. Hearon and the
56
<PAGE>
Company, and requires Mr. Hearon to devote substantially all of his business
time, attention and energy exclusively to the business of the Company, and to
use his best efforts to promote the success of the Company's business. In
exchange, Mr. Hearon is entitled to (i) receive an annual salary, commencing
March 1, 1998, of $150,000 (subject to annual review by the Board of
Directors), (ii) earn an incentive bonus in accordance with the Company's
bonus plan to be established for its executives, (iii) receive a signing
bonus of $30,000, (iv) an option under the Company's 1997 Amended and
Restated Stock Option Plan to purchase 75,000 shares of Class A Common Stock
at a price of $0.39 per share which vests ratably over a four-year period and
(v) participate in the Company's other employee benefit plans. Mr. Hearon's
employment agreement is terminable by the Company at any time for "cause," as
specified in the agreement, and in certain other events. The employment
agreement also contains covenants limiting Mr. Hearon's right to compete with
the Company during the term of the employment agreement and for two years
after his termination of employment.
Effective March 3, 1997, the Company entered into a three-year
executive employment agreement with Ray C. Davis, the founder of the Company.
The agreement was automatically renewable at the end of its initial term for
consecutive one-year terms and provided for an annual base salary of
$220,000, and incentives (annual and long-term), retirement benefits, welfare
benefits, and fringe benefits which were available to other executive
employees of the Company. Mr. Davis received a $50,000 signing bonus from the
Company upon execution of his agreement. The agreement also contained
provisions for the acceleration of certain compensation due to Mr. Davis in
the event of a "change of control" of the Company, as defined in the
agreement.
Effective April 13, 1998, the employment agreement between the
Company and Ray C. Davis was terminated and Mr. Davis entered into a new
employment agreement with the Company. The agreement had an initial term of
five years, and provided for Mr. Davis to (i) receive an annual salary,
commencing April 13, 1998, of $150,000 (subject to annual review by the Board
of Directors), (ii) receive a warrant to purchase an aggregate of 2,000,000
shares of Class A Common Stock at a price of $1.00 per share and (iii)
participate in certain of the Company's other employee benefit plans. The
employment agreement provided that Mr. Davis devote approximately one-half of
his business time and attention to the business of the Company. All
inventions and technological improvements to the Company's software developed
by Mr. Davis during the term of the employment agreement became the property
of the Company and the Company is not required to compensate Mr. Davis for
any such inventions or improvements. The employment agreement also contained
covenants limiting Mr. Davis's right to compete with the Company during the
term of the employment agreement and for three years after his termination of
employment. Effective August 31, 1998, Mr. Davis resigned from the Company,
and the Company and Mr. Davis entered into a Settlement Agreement and Mutual
Release in Full (the "Davis Settlement"), providing for (i) the termination
of Mr. Davis' employment agreement with the Company, (ii) the Company's
forgiveness and release of $121,043.14 in indebtedness owed by Mr. Davis to
the Company, and (iii) Mr. Davis' release of claims against the Company with
respect to his employment agreement. See "--Certain Transactions."
Effective July 22, 1998, the Company entered into an employment
agreement with Bernard B. Beale pursuant to which Mr. Beale serves as the
Executive Vice President of the Company. The agreement has an initial term of
four years and can continue for additional one-year periods upon the
agreement of Mr. Beale and the Company, and requires Mr. Beale to devote
substantially all of his business time, attention and energy exclusively to
the business of the Company, and to use his best efforts to promote the
success of the Company's business. In exchange, Mr. Beale is entitled to (i)
receive an annual salary, commencing July 22, 1998, of $150,000 (subject to
annual review by the Board of Directors), (ii) earn an incentive bonus in
accordance with the Company's bonus plan to be established for its
executives, (iii) receive a signing bonus of $30,000, (iv) an option under
the Company's 1997 Amended and Restated Stock Option Plan to purchase 150,000
shares of Class A Common Stock at a price of $0.39 per share which vests
immediately when granted and (v) participate in the Company's other employee
benefit plans. Mr. Beale's employment agreement is terminable by the Company
at any time for "cause," as specified in the agreement, and in certain other
events. The employment agreement also contains covenants limiting Mr. Beale's
right to compete with the Company during the term of the employment agreement
and for two years after his termination of employment.
Effective July 22, 1998, the Company entered into an employment
agreement with Samuel C. Beale pursuant to which Mr. Beale serves as the Vice
President, General Counsel and Secretary of the Company. The agreement has an
initial term of three years and can continue for additional one-year periods
upon the agreement of Mr. Beale and the
57
<PAGE>
Company, and requires Mr. Beale to devote substantially all of his business
time, attention and energy exclusively to the business of the Company, and to
use his best efforts to promote the success of the Company's business. In
exchange, Mr. Beale is entitled to (i) receive an annual salary, commencing
July 22, 1998, of $108,000 (subject to annual review by the Board of
Directors), (ii) earn an incentive bonus in accordance with the Company's
bonus plan to be established for its executives, (iii) receive a signing
bonus of $30,000, (iv) an option under the Company's 1997 Amended and
Restated Stock Option Plan to purchase 100,000 shares of Class A Common Stock
at a price of $0.39 per share which vests immediately when granted and (v)
participate in the Company's other employee benefit plans. Mr. Beale's
employment agreement is terminable by the Company at any time for "cause," as
specified in the agreement, and in certain other events. The employment
agreement also contains covenants limiting Mr. Beale's right to compete with
the Company during the term of the employment agreement and for two years
after his termination of employment.
Effective August 26, 1998, the Company entered into an employment
agreement with R. Greg Smith pursuant to which Mr. Smith serves as the Vice
President Finance and Chief Financial Officer of the Company. The agreement
has an initial term of three years and can continue for additional one-year
periods upon the agreement of Mr. Smith and the Company, and requires Mr.
Smith to devote substantially all of his business time, attention and energy
exclusively to the business of the Company, and to use his best efforts to
promote the success of the Company's business. In exchange, Mr. Smith is
entitled to (i) receive an annual salary, commencing August 26, 1998, of
$125,000 (subject to annual review by the Board of Directors), (ii) earn an
incentive bonus in accordance with the Company's bonus plan to be established
for its executives, (iii) receive a signing bonus of $30,000, (iv) an option
under the Company's 1997 Amended and Restated Stock Option Plan to purchase
100,000 shares of Class A Common Stock at a price of $0.39 per share which
vests ratably over a three-year period and (v) participate in the Company's
other employee benefit plans. Mr. Smith's employment agreement is terminable
by the Company at any time for "cause," as specified in the agreement, and in
certain other events. The employment agreement also contains covenants
limiting Mr. Smith's right to compete with the Company during the term of the
employment agreement and for two years after his termination of employment.
STOCK OPTION PLAN
On October 20, 1997, the Board of Directors and a majority of the
holders of the Class A Common Stock adopted the Company's 1997 Stock Option
Plan, which plan was restated effective July 31, 1999 (the "1997 Plan").
The 1997 Plan provides for the granting of stock options ("Options")
to key employees of the Company. Within certain limitations provided by the
1997 Plan, such Options may include provisions regarding vesting, exercise
price, the amount of each grant and other terms as shall be approved by the
Board of Directors or by a committee designated by the Board of Directors.
Options granted under the 1997 Plan may be either options that qualify as
"incentive stock options," within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("Incentive Options"), or those that do not
qualify as such "incentive stock options" ("Non-qualified Options"). The 1997
Plan, which permits up to 2,000,000 shares of the Company's Class A Common
Stock to be issued, terminates on October 19, 2007.
The 1997 Plan is administered by the Board or by a Compensation
Committee of the Board of Directors, which committee, to the extent required
to qualify for certain exemptions under Rule 16b-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, to satisfy the
requirements of Section 162(m) of the Code, will at all times consist of at
least two non-employee directors. Subject to the terms of the 1997 Plan, the
Board of Directors or a Compensation Committee determines the persons to whom
Options are granted and the terms and the number of shares covered by each
Option. The term of each Option may not exceed ten years from the date the
option is granted, or five years in the case of an Incentive Option granted
to a holder of more than 10% of the fully-diluted capital stock of the
Company. Non-qualified Options and Incentive Options may become exercisable
six months after the date of grant and may continue to be exercisable, in
whole or in part, up to ten years after the date of grant, as determined by
the Board of Directors or the Compensation Committee.
The 1997 Plan provides that all Incentive Options and Non-qualified
Options which are not exercisable on the date of termination of an option
holder's employment generally expire when the optionee ceases to be employed
by the
58
<PAGE>
Company; however, the Board of Directors or the Compensation Committee may,
in its discretion, permit the holder to exercise unvested options upon such
termination. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee. The 1997 Plan provides that each stock option
agreement with respect to any Non-qualified Option or Incentive Option shall
specify the effects of termination of employment on exercisability of such
options.
The 1997 Plan contains a provision accelerating the exerciseablity
of Options upon the occurrence of specified events, including a merger,
consolidation, dissolution or liquidation of the Company. The acceleration of
vesting of the Options in the event of a merger or other similar event may
have the effect of discouraging a proposal for merger, a takeover attempt or
other efforts to gain control of the Company.
Incentive Options to purchase shares of the Class A Common Stock
have been granted to Vincent W. Beale, Sr., Bernard B. Beale, David R.
Hearon, Jr., Samuel C. Beale and R. Greg Smith under the 1997 Plan in
accordance with their respective employment agreements described in
"-- Employment Agreements" above as follows: 100,000 shares to Vincent W.
Beale, Sr. which vest immediately on the date of grant, 150,000 shares to
Bernard B. Beale which vest immediately on the date of grant, 100,000 shares
to Samuel C. Beale which vest immediately on the date of grant, 75,000 shares
to David R. Hearon, Jr. which vest ratably over a four-year period, 100,000
shares to Wayne Schroeder which vest immediately on the date of grant, and
100,000 shares to R. Greg Smith which vest ratably over a three-year period.
Each of these stock options has an exercise price of $0.39 per share.
CONSULTING SERVICES
Pursuant to the terms of the Rescission Financing, the Company will
enter into a Consulting Agreement (the "Enron Advisory Agreement") with HEOF,
a Rescission Underwriter and an affiliate of Enron Corporation, pursuant to
which HEOF will agree to provide certain business advisory services to the
Company. Pursuant to the Enron Advisory Agreement, the Company will issue a
warrant entitling HEOF to purchase up to 376,000 shares of Class A Common
Stock at a purchase price of $2.00 per share upon the completion of the
Rescission Financing. The warrant will be exercisable, in whole or in part,
at any time during the three-year period beginning on the date of issuance.
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION
Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their shareholders for monetary
damages under certain conditions and circumstances. The Articles of
Incorporation of the Company limit the liability of directors of the Company
(in their capacity as directors, but not in their capacity as officers) to
the Company or its shareholders to the fullest extent permitted by Texas law.
Specifically, no director of the Company will be personally liable to the
Company or its shareholders for monetary damages for any act or omission in
such director's capacity as a director, except for (i) a breach of the
director's duty of loyalty to the Company or its shareholders, (ii) acts or
omissions not in good faith which involve intentional misconduct or a knowing
violation of the law, (iii) an act or omission for which the liability of a
director is expressly provided for by an applicable statute or (iv) any
transaction from which the director derived an improper personal benefit,
whether or not the benefit resulted from an action taken in the person's
official capacity.
The inclusion of this provision in the Company's Articles of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter shareholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted the Company and its shareholders. However, such limitation on
liabilities does not affect the standard of conduct with which directors must
comply, the availability of equitable relief or any causes of action based on
federal law.
The Company's Articles of Incorporation provide for the
indemnification of its current and former officers and directors to the
fullest extent permitted by applicable law.
59
<PAGE>
CERTAIN TRANSACTIONS
RAY C. DAVIS. In May and August of 1995, the Company issued an
aggregate of 10,000,000 shares of Class A Common Stock (after giving effect
to a nine for one share dividend) to the Davis Family Partnership, Ltd., the
Charles C. Davis Trust, the Nicholas M. Davis Trust and the Rachel I. Davis
Trust (collectively, the "Davis Interests") for services rendered by Ray C.
Davis in connection with the organization of the Company. The Company valued
such services at $1,000.
In August 1996, the Company purchased 277,000 shares of Class A
Common Stock from the Davis Family Partnership, Ltd. for $277,000. The
purchase price of $1.00 per share of Class A Common Stock was deemed by Mr.
Davis, the then sole director of the Company, to be equal to the fair market
value of the shares purchased based upon sales of shares of Class A Common
Stock by the Company to private investors, at or near the time of the
purchase of shares from the Davis Family Partnership, Ltd. A majority of the
proceeds from the sale of shares of Class A Common Stock to the Company was
used by Mr. Davis to repay certain loans and advances made to him by the
Company during prior periods.
Effective March 3, 1997, Mr. Davis assigned to the Company all
right, title and interest to all "intellectual property" which Mr. Davis
owned. In exchange for such assignment, the Company paid Mr. Davis $250,000.
The Assignment of Intellectual Property executed by Mr. Davis in favor of the
Company defines "intellectual property" to include (i) all patents, patent
applications, patent disclosures and related documents, (ii) all trademarks,
service marks, trade dress logos and trade names, (iii) all copyrights and
registrations and applications for registration thereof, (iv) all mask works
and registrations and applications for registrations, (v) all computer
software, data and documentation, (vi) all trade secrets and confidential
business information, know how, and related business information, (vii) all
proprietary rights relating to any of the foregoing items and (viii) all
copies and tangible embodiments of any of the foregoing.
In April 1998, the Company transferred certain property having a net
book value of $67,283 to Mr. Davis and recorded such transfers as
compensation. This amount is in addition to compensation paid to Mr. Davis
under his employment agreements. See Note 6 of the Notes to Consolidated
Financial Statements.
Effective August 31, 1998, Mr. Davis resigned as a director, officer
and employee of the Company and the Company and Mr. Davis entered into the
Davis Settlement providing for (i) the termination of Mr. Davis' employment
agreement with the Company, (ii) the Company's forgiveness and release of
claims of $121,043 in indebtedness owed by Mr. Davis to the Company, and
(iii) Mr. Davis' release of claims against the Company with respect to his
employment agreement.
JEAN-DAVID BENICHOU. In July 1996, the Company issued an aggregate
of 1,050,000 of Class A Common Stock to the principals of International Fax
Corporation ("IFC") and IMedia, S.A. of France ("Imedia") in connection with
(i) an agreement granting the Company a right of first refusal to acquire all
of the outstanding capital stock of IMedia, (ii) the right to utilize
IMedia's European network of fax broadcasting equipment and (iii) the
agreement of IMedia to use the Company's network for fax broadcast traffic to
the United States. The shares of Class A Common Stock were valued by the
Company at $1.00 per share. In connection with this transaction, Ray C. Davis
caused the Davis Interests to sell Jean-David Benichou, a principal of IFC
and IMedia, 250,000 shares of Class A Common Stock at a price of $1.00 per
share. Subsequent to this series of transactions, the Company wrote off the
value of its investment.
VICKROY STONE. Between May 1996 and July 1996, the Company paid
$117,401 and issued 500,000 shares of Class A Common Stock (valued at $1.00
per share) to Vickroy Stone in exchange for services rendered. In February
1997, the Company repurchased 450,000 of such shares of Class A Common Stock
from Mr. Stone at a purchase price of $1.00 per share. In February 1997, Mr.
Stone sold the remaining 50,000 shares of Class A Common Stock to a
partnership affiliated with Ray C. Davis for $1.00 per share. In May 1997,
the Company issued a five-year warrant to Vickroy Stone entitling Mr. Stone
to purchase an aggregate of 450,000 shares of Class A Common Stock at an
exercise price of $2.00 per share.
60
<PAGE>
KEITH SHAFFNER. In November 1996, the Company issued warrants to
purchase an aggregate of 738,000 shares of Class A Common Stock at an
exercise price of $1.00 per share to various persons for assistance in the
organization and formation of the LLCs. Among the persons receiving such
warrants was Keith Shaffner, formerly a Vice President of the Company. Mr.
Shaffner received a warrant to purchase 145,500 shares of Class A Common
Stock in this transaction, the value of which was $37,830. Also in 1996, the
Company paid Mr. Shaffner an aggregate of $111,315 for services rendered. On
November 14, 1997, the Company entered into a Settlement Agreement and Mutual
Release with Mr. Shaffner for services rendered by him during 1996 and 1997.
In exchange for a complete release of all claims by Mr. Shaffner and his
affiliate, CyFax, Inc. ("CyFax"), against the Company, the Company issued to
Mr. Shaffner: (i) a warrant to purchase 1,150,000 shares of Class B Common
Stock at a price of $1.00 per share, exercisable on or before August 30, 1999
(which the Company has agreed to extend until November 4, 2001), valued at
$184,000 at the time of issuance, (ii) a warrant to purchase 1,050,000 shares
of Class B Common Stock at a price of $1.00 per share, exercisable on or
before February 28, 2000 (which the Company has agreed to extend until
November 4, 2001), valued at $178,500 at the time of issuance, (iii) 500,000
shares of Class A Common Stock, valued at $500,000 at the time of issuance,
and (iv) $51,000 in cash. The extension of these warrants requires the
Company to recognize a non-cash charge of approximately $1,300,000 during the
third quarter of 1999. See Note 15 of the Notes to Consolidated Financial
Statements. In addition, the Company issued 200,000 shares of Class A Common
Stock, valued at $78,000, to CyFax for the termination of an exclusive agent
management agreement with the Company. The Company also paid Mr. Shaffner,
individually, $91,636, and CyFax an aggregate of $893,527 for services
rendered in 1997.
CYNET HOLDINGS, LLC. From February 1998 through July 1998, Cynet
Holdings purchased an aggregate of 9,473,000 shares of Class A Common Stock
from the Davis Interests for an aggregate amount of $1,250,000. The funds
utilized by Cynet Holdings to purchase such shares were generated from Cynet
Holdings' equity capital. Vincent W. Beale, Sr. is the President and majority
owner of Cynet Holdings. In July 1998 the Company entered into a Holdings
Subscription Agreement with Cynet Holdings, pursuant to which Cynet Holdings
committed to purchase up to 10,000,000 shares of Class A Common Stock of the
Company for $1.00 per share prior to December 31, 1998. The Subscription
Agreement was subsequently amended to extend the duration of the Agreement to
December 31, 1999 and (ii) permit the issuance of Class B Common Stock to the
extent that no authorized Class A Common Stock is available. As soon as
practicable after the completion of the Rescission Offer, the Company intends
to offer the holders of the Class B Common Stock the right to exchange their
shares of Class B Common Stock for an equal number of shares of Class A
Common Stock. In addition, the Company intends to increase the number of
authorized shares of its Common Stock to 100 million shares at a special
meeting of the Company's shareholders. As of August 31, 1999 Cynet Holdings
had contributed to the Company $4,106,000 in cash in exchange for 4,106,000
shares of Class A Common Stock. In 1998, 250,000 shares of Class A Common
Stock purchased by Cynet Holdings were pledged to an unaffiliated financial
institution and subsequently foreclosed upon. Also pursuant to the Holdings
Subscription Agreement, the Company (i) issued a five-year warrant entitling
Cynet Holdings to purchase an aggregate of 4,800,000 shares of Class A Common
Stock at a price of $1.00 per share and (ii) entered into a registration
rights agreement granting Cynet Holdings certain registration rights covering
the Company's securities held by Cynet Holdings. Cynet Holdings has also
entered into an Underwriting Agreement with the Company pursuant to which
Cynet Holdings will purchase 89,057 shares of Class A Common Stock for $1.37
per share as a Rescission Underwriter in the Rescission Financing.
In July 1999, the Company entered into a Purchase and Sale Agreement
with Cynet Holdings (the "Cynet Interactive Agreement"), pursuant to which
Cynet Holdings transferred all of the outstanding membership interests of
Cynet Interactive to the Company, resulting in Cynet Interactive becoming a
wholly-owned subsidiary of the Company. In consideration for this transfer,
the Company forgave a $118,936 account receivable due from Cynet Interactive.
Since August 1999, Cynet Holdings has provided the Company
additional short-term financing of $277,000. These borrowings are unsecured,
non-interest bearing and are due on demand.
EXECUTIVE EMPLOYMENT AGREEMENTS. In 1998 the Company entered into
employment agreements with each of Vincent W. Beale, Sr., Bernard B. Beale,
David P. Hearon, Jr., Samuel C. Beale and R. Greg Smith. See "-- Employment
Agreements."
61
<PAGE>
CYNET INTERACTIVE. On July 31, 1999, the Company acquired from Cynet
Holdings all of the outstanding membership interests of Cynet Internactive, a
wholly-owned subsidiary of Cynet Holdings, pursuant to the terms of the Cynet
Interactive Agreement between the Company and Cynet Holdings. Cynet
Interactive is a Houston, Texas-based Internet content provider, whose
services include graphic and copy design, application development and web
hosting services. Pursuant to the Cynet Interactive Agreement, the Company
acquired all of the membership interests of Cynet Interactive from Cynet
Holdings in exchange for the Company's forgiveness of a $118,936 account
receivable due from Cynet Interactive. As a result of the acquisition of
Cynet Interactive, Cynet Interactive became a wholly-owned subsidiary of the
Company. The acquisition of Cynet Interactive was approved by the
disinterested members of the Company's Board of Directors.
COMPANY POLICY
Any future transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will be approved
in advance by a majority of the disinterested members of the Board of
Directors.
62
<PAGE>
PRINCIPAL SHAREHOLDERS
Assuming 100% rejection of the Rescission Offer and the successful
completion of the Rescission Financing, the following table sets forth, as of
August 31, 1999, the number of outstanding shares of Class A Common Stock
(the Company's only class of voting securities) owned by (i) each person
known by the Company to beneficially own more than 5% of its outstanding
Class A Common Stock, (ii) each director, (iii) each named executive officer
and (iv) all officers and directors as a group.
<TABLE>
<CAPTION>
SHARES OF CLASS A COMMON
NAME OF BENEFICIAL OWNER STOCK BENEFICIALLY OWNED PERCENT OF CLASS(1)
- ----------------------------------------------- -------------------------------- -----------------------------
<S> <C> <C>
Cynet Holdings, LLC 18,218,057 shares(2) 50.0%
Vincent W. Beale, Sr. 20,028,057 shares(3) 55.0%
Bernard B. Beale 150,000 shares(4) *%
David R. Hearon, Jr. 18,750 shares(4) *%
Samuel C. Beale 100,000 shares(4) *%
Wayne Schroeder 100,000 shares(4) *%
R. Greg Smith 33,333 shares(4) *%
All directors and executive officers
as a group (6 people) 20,430,140 shares(5) 56.1%
</TABLE>
- --------------------------
* Less than one percent.
(1) Percentages shown are based upon (i) 27,214,707 shares of Class A
Common Stock presently outstanding, (ii) warrants to purchase
8,425,000 shares of Class A Common Stock and (iii) 794,313 shares
subject to vested stock options.
(2) Includes (i) 9,473,000 shares purchased from the Davis Interests,
(ii) 4,106,000 shares purchased pursuant to the Holdings
Subscription Agreement, (iii) 4,800,000 shares which may be
purchased at any time prior to April 13, 2003, at a purchase price
of $1.00 per share, upon exercise of a warrant issued pursuant to
the Holdings Subscription Agreement, and (iv) 89,057 shares to be
purchased as part of the Rescission Financing. See "Management --
Certain Transactions". The amount excludes 250,000 shares which were
pledged to an unaffiliated financial institution in 1998 and
subsequently foreclosed upon.
(3) Represents (i) 18,218,057 shares of Class A Common Stock
beneficially owned of record by Cynet Holdings, of which Mr. Beale
is the President and majority owner, (ii) 1,710,000 shares subject
to warrants which Mr. Beale received from Ray C. Davis in July 1998
and (iii) 100,000 shares subject to vested stock options.
(4) Represents shares subject to vested stock options.
(5) Includes an aggregate of 7,012,083 shares of Class A Common Stock
that such persons have the right to acquire within 60 days pursuant
to warrants and options held by such persons.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 60,000,000 shares
of Common Stock and 10,000,000 shares of Preferred Stock. The following
summary description of certain terms of the capital stock of the Company is
qualified in its entirety by reference to the Company's Articles of
Incorporation, which is included as an exhibit to the Registration Statement
of which this Prospectus is a part.
63
<PAGE>
COMMON STOCK
The Company has authorized 60,000,000 shares of Common Stock, no par
value, of which 40,000,000 shares have been designated as Class A Common
Stock and 20,000,000 shares have been designated as Class B Common Stock. As
of the date of this Prospectus, assuming the successful completion of the
Rescission Offer and the Rescission Financing, 27,214,707 shares of Class A
Common Stock and 3,119,762 shares of Class B Common Stock will be
outstanding. In addition, warrants to purchase 8,425,000 shares of Class A
Common Stock and warrants to purchase 2,550,954 shares of Class B Common
Stock will be outstanding. Except as required by applicable law, including
the Texas Business Corporation Act ("TBCA"), the holders of Class B Common
Stock have no voting rights. The holders of Class B Common Stock are entitled
under the TBCA to vote in connection with the voluntary dissolution of the
Company. The holders of both Class A and Class B Common Stock are entitled to
receive such dividends, if any, as may be declared by the Board of Directors
from time to time out of legally available funds. Upon liquidation or
dissolution of the Company, the holders of both Class A and Class B Common
Stock are entitled to share ratably in all assets of the Company that are
legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. Holders of Class A and Class B Common Stock have no
preemptive rights to acquire new securities issued by the Company and have no
rights to convert their Common Stock into any other securities of the Company.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred
Stock, no par value ("Preferred Stock"). The Preferred Stock may be issued in
one or more series, the terms of which may be determined at the time of
issuance by the Board of Directors, without further action by shareholders,
and may include voting rights (including the right to vote as a series on
particular matters), preferences as to dividends and liquidation, conversion,
redemption rights and sinking fund provisions.
The Company has an aggregate of 190,849 shares of Preferred Stock
outstanding as of the date of this Prospectus. The Company has no present
plans for the issuance of additional shares of Preferred Stock.
SERIES A PREFERRED STOCK
The Board of Directors has authorized the issuance of 3,600,000
shares of Series A Preferred Stock. As of the date of this Prospectus,
103,500 shares of Series A Preferred Stock are outstanding.
RANKING. The Series A Preferred Stock ranks senior to the Company's
Class A and Class B Common Stock and Series B Preferred Stock with respect to
dividends and rights upon liquidation or dissolution of the Company. As long
as any Series A Preferred Stock is outstanding, the Company cannot create,
authorize or issue any class of securities that is senior to or on parity
with the Series A Preferred Stock without the approval of holders of at least
66 2/3% of the Series A Preferred Stock.
VOTING RIGHTS. Except as required by applicable law, holders of
Series A Preferred Stock are not entitled to vote.
DIVIDEND RIGHTS. The holders of Series A Preferred Stock are
entitled to receive out of funds of the Company legally available therefor,
dividends at an annual rate of $0.24 per share. Such dividends are payable
semi-annually in arrears in equal installments of $0.12 on June 15 and
December 15. Dividends accrue and cumulate from the date of first issuance
and are paid to holders of record as of the record date of the last day of
May and November in each year. Accumulated dividends do not bear interest. So
long as any shares of the Series A Preferred Stock is outstanding, the
Company may not declare or pay any dividend on the Class A or Class B Common
Stock until all accumulated, unpaid dividends on the Series A Preferred Stock
have been paid in full.
64
<PAGE>
CONVERSION AND MANDATORY CONVERSION. Shares of Series A Preferred
are convertible by the holder at any time before September 1, 1998 at a
conversion rate of 1.1 shares of Class A Common Stock for each share of
Series A Preferred Stock, and thereafter at a conversion rate of one for one.
Any accrued and unpaid dividends are payable to holders of the Series A
Preferred Stock at the time of conversion. At any time on or after January 1,
1999, the Company may cause the conversion of the Series A Preferred Stock,
in whole or in part, at the rate of one share of Class A Common Stock for
each share of Series A Preferred Stock. The Company intends to exercise its
rights to convert the Series A Preferred Stock within 60 days after the
completion of the Rescission Offer.
LIQUIDATION RIGHTS. In the event of liquidation or dissolution of
the Company, whether voluntary or otherwise, after payment or provision for
payment of the debts and other liabilities of the Company, the holders of the
Series A Preferred Stock are entitled to receive, out of the remaining net
assets of the Company available for distribution to shareholders before any
distribution or payment made to holders of Class A or Class B Common Stock or
other junior capital stock, the Series A Preferred Stock stated value of
$2.00 per share, plus any accrued and unpaid dividends. Upon payment of the
full amount of such stated value plus any unpaid dividends, the holders of
Series A Preferred Stock are not entitled to any further participation in any
distribution of assets of the Company.
SERIES B PREFERRED STOCK
The Board of Directors has authorized the issuance of 2,000,000
shares of Series B Preferred Stock. As of the date of this Prospectus, 87,349
shares of Series B Preferred Stock are outstanding.
RANKING. The Series B Preferred Stock ranks junior to the Series A
Preferred Stock and senior to the Company's Class A and Class B Common Stock
with respect to dividends and rights upon liquidation or dissolution of the
Company. As long as any Series B Preferred Stock is outstanding, the Company
cannot create, authorize or issue any class of securities that is senior to
or on parity with the Series B Preferred Stock without the approval of
holders of at least 66 2/3% of the Series B Preferred Stock.
VOTING RIGHTS. Except as required by applicable law, holders of
Series B Preferred Stock are not entitled to vote.
DIVIDEND RIGHTS. The holders of Series B Preferred Stock are
entitled to receive, out of funds of the Company legally available therefor,
dividends at an annual rate of $0.30 per share. Such dividends are payable
semi-annually in arrears in equal installments of $0.15 on June 15 and
December 15. Dividends accrue and cumulate from the date of first issuance
and are paid to holders of record as of the record date of the last day of
May and November in each year. Accumulated, unpaid dividends do not bear
interest. So long as any shares of the Series A or B Preferred Stock is
outstanding, the Company may not declare or pay any dividend on the Class A
or Class B Common Stock or other capital stock until all accumulated, unpaid
dividends on the Series A and Series B Preferred Stock have been paid in full.
CONVERSION AND MANDATORY CONVERSION. Shares of Series B Preferred
Stock are convertible by the holder at any time before September 1, 1998 at a
conversion rate of 1.1 shares of Class B Common Stock for each share of
Series B Preferred Stock, and thereafter at a conversion rate of one for one.
Any accrued and unpaid dividends are payable to holders of the Series B
Preferred Stock at the time of conversion. At any time on and after January
1, 1999, the Company may cause the conversion of the Series B Preferred
Stock, in whole or in part, at the rate of one share of Class B Common Stock
for each share of Series B Preferred Stock. The Company intends to exercise
its rights to convert the Series B Preferred Stock within 60 days after the
completion of the Rescission Offer.
LIQUIDATION RIGHTS. In the event of liquidation or dissolution of
the Company, whether voluntary or otherwise, after payment or provision for
payment of the debts, other liabilities of the Company, and Series A
Preferred shareholders, the holders of the Series B Preferred Stock are
entitled to receive, out of the remaining net assets of the Company available
for distribution to shareholders, before any distribution or payment made to
holders of Class A or Class B Common Stock or other junior capital stock, the
Series B Preferred Stock stated value of $3.00 per share plus any accrued and
unpaid dividends. Upon payment of the full amount of such stated value plus
any unpaid dividends,
65
<PAGE>
the holders of Series B Preferred Stock are not entitled to any further
participation in any distribution of assets by the Company.
WARRANTS
The Company has issued warrants to purchase an aggregate of
8,425,000 Shares of Class A Common Stock at exercise prices ranging from
$1.00 to $2.00 per share expiring no later than July 2003, and warrants to
purchase an aggregate of 2,550,954 shares of Class B Common Stock at exercise
prices ranging from $1.00 to $2.00 per share, expiring no later than May
2003.
TRANSFER AGENT
The Transfer Agent and Registrar for the Class A Common Stock and
Class B Common Stock is American Securities Transfer & Trust, Inc.
66
<PAGE>
PLAN OF DISTRIBUTION AND SELLING SHAREHOLDERS
RESCISSION UNDERWRITERS
This Prospectus also relates to the issuance of 3,649,635 shares
of Class A Common Stock to the Rescission Underwriters pursuant to the terms
of the Rescission Financing. The table below sets forth certain information
concerning the issuance and resale of shares of Class A Common Stock to be
issued to the Rescission Underwriters.
<TABLE>
<CAPTION>
SHARES TO BE ISSUED TO THE
RECISSION UNDERWRITERS
- ---------------------------------------------------------------------------------------------------------------------
Recission Underwriter Shares Held Maximum Shares Held Percentage
Before Number of Price Per After Held After
Rescission Shares to be Share Rescission Rescission
Offer Issued Offer Offer(1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
HEOF -0- 1,605,840 $ 1.37 1,605,840 4.4%
- ---------------------------------------------------------------------------------------------------------------------
Northern Neck Outfitters, -0- 729,927 1.37 729,927 2.0%
Inc.
- ---------------------------------------------------------------------------------------------------------------------
Cress Brothers Investments, -0- 620,438 1.37 620,438 1.7%
L.L.C.
- ---------------------------------------------------------------------------------------------------------------------
Leonard Childress -0- 411,672 1.37 411,672 1.1%
- ---------------------------------------------------------------------------------------------------------------------
TKNET Investments, Inc. -0- 119,708 1.37 119,708 .33%
- ---------------------------------------------------------------------------------------------------------------------
Nancy Monthofer -0- 72,993 1.37 72,993 .20%
- ---------------------------------------------------------------------------------------------------------------------
Cynet Holdings, LLC(2) 18,129,000 89,057 1.37 18,218,057 50.0%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
(1) Percentages shown are based upon (i) 27,214,707 shares of Class A
Common Stock presently outstanding, (ii) warrants to purchase 8,425,000
shares of Class A Common Stock and (iii) 794,313 shares subject to
vested stock options.
(2) Cynet Holdings has been a controlling shareholder of the Company since
January 1998.
The Company will bear the costs incidental to the registration of these
shares, except that each Rescission Underwriter will bear his proportional share
of underwriting discounts, selling commissions, any applicable stock transfer
taxes and the costs of any separate counsel retained.
SELLING SHAREHOLDERS
This Prospectus also relates to the resale of up to 2,200,000 shares of
Class B Common Stock by Keith Shaffner and his assignees (collectively, the
"Selling Shareholders") upon exercise of the Shaffner Warrants to purchase up to
2,200,000 shares of Class B Common Stock.
The table below sets forth information concerning the resale by the
Selling Shareholders of shares of Class B Common Stock subject to the Shaffner
Warrants.
67
<PAGE>
<TABLE>
<CAPTION>
RESALE OF CLASS B COMMON STOCK
UNDERLYING WARRANTS
- ---------------------------------------------------------------------------------------------------------------------
Percentage
Held After
Shares Subject to Amount Offered (assuming Shares Subject to Rescission
Warrant Holder Warrants Before Resale all shares are sold) Warrants After Resale Offer
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kemah Partners Ltd 50,000 50,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Lifestyle Foods Inc. 10,000 10,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Ramnet Trust Jerry O. and 85,000 85,000 -0- 0%
family Garfield
- ---------------------------------------------------------------------------------------------------------------------
Leonard J. Miller or Yvonne L. 5,000 5,000 -0- 0%
Miller
- ---------------------------------------------------------------------------------------------------------------------
Kenneth S. Cahill and/or Joan 2,500 2,500 -0- 0%
M. Cahill
- ---------------------------------------------------------------------------------------------------------------------
Ronald Johnson 30,000 30,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Ronald Pohl 58,000 58,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Kenneth S. Cahill and/or Joan 2,500 2,500 -0- 0%
M. Cahill
- ---------------------------------------------------------------------------------------------------------------------
Kenneth F. Winn 15,000 15,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Fredrick H. Kohr 10,000 10,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Douglas Grice 25,000 25,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Richard Tabby 1,000 1,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Noorudin Paracha 7,000 7,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Richard Tabby 2,000 2,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Kozikouski Trust 78,000 78,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Larry E. Wolfe 20,000 20,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Ben Schulyk 700 700 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Vincent Trust, Isidore Cipriano 25,000 25,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Anthony V. Ciamitaro 1,500 1,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Buetson Trust 64,000 64,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Shirley Sadowski 15,500 15,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Greg & Judy Horner 10,000 10,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Lorenzo & Catherine Alongi 5,000 5,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Ron & Rose Que 2,500 2,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Leanne Kozup 7,500 7,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Ken Gradeless 2,000 2,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Tony Medina 2,000 2,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Irene Maurey 10,000 10,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Richard C. Filippone 250 250 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Craig Fuller 3,200 3,200 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Bradley Horner 5,000 5,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Veronica Horner 5,000 5,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Dwight Lafoon 1,000 1,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Emery Ozdych 5,000 5,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Robert Horner 108,000 108,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Amy B. Grice 10,000 10,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Regina B. Grice 25,000 25,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Midstates Marketing 314,580 314,580 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
David Marshall 2,500 2,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Dan Rice 6,000 6,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
George Cretu 2,000 2,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Dennis Habite 3,000 3,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Greg Karguia 1,500 1,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
John Benchick, Sr. 7,000 7,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
John Benchick, Jr. 10,000 10,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Tom Fransico 2,800 2,800 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Percentage
Held After
Shares Subject to Amount Offered (assuming Shares Subject to Rescission
Warrant Holder Warrants Before Resale all shares are sold) Warrants After Resale Offer
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tim Francisco 600 600 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Matt Seeley 1,000 1,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Dolly Briston 1,000 1,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Tim Alvaro 1,000 1,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Norman Jordan 3,250 3,250 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Murtin M. Grice 15,000 15,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Amos Greene 5,000 5,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Dean Meisenger 6,000 6,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Miles Reese 12,000 12,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Joyce Graves 2,000 2,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Charles (Kim) Sparre 5,000 5,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Karen Pardo 3,000 3,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Don Toth 2,500 2,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
John Barnes 3,000 3,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Pauline Cassidy 325 325 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Hamul Trust (Mike J.) 300 300 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Jim Mann 900 900 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Will Steger 600 600 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Marcus Sanchez 10,000 10,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Isador Cipriano 25,000 25,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Vincent Trust, Isidore Cipriano 12,500 12,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Lorenzo & Catherine Alongi 5,000 5,000 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Ron & Rose Que 2,500 2,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Anthony V. Ciarmitaro 1,500 1,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Anthony V. Ciarmitaro 12,500 12,500 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Keith Shaffner(1) 1,009,995 1,009,995 -0- 0%
- ---------------------------------------------------------------------------------------------------------------------
Total 2,200,000 2,200,000 -0- 0%
========= ========= === ==
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
(1) From June 1997 to August 1997, Mr. Shaffner served as a Vice
President of the Company.
The Company will bear the costs incidental to the registration of
these shares, except that each Selling Shareholder will bear his proportional
share of underwriting discounts and commissions and the costs of any separate
counsel retained. The Company will receive gross proceeds of $1.00 per share
to the extent of cash exercises of the Shaffner Warrants (a maximum of
$2,200,000).
The Company has extended the expiration of the Shaffner Warrants until
November 4, 2001.
The 3,649,635 shares of Class A Common Stock to be issued to the
Rescission Underwriters and the 2,200,000 shares of Class B Common Stock
underlying the Shaffner Warrants offered by the Selling Shareholders, may be
sold by one or more of the following methods, without limitation: (i) ordinary
brokerage transactions and transactions in which the broker solicits purchases;
and (ii) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Rescission
Underwriters or the Selling Shareholders may arrange for other brokers or
dealers to participate. Such brokers or dealers may receive commissions or
discounts from the Rescission Underwriters or the Selling Shareholders in
amounts to be negotiated. Such brokers and dealers and any other participating
brokers or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act. The Rescission Underwriters or the Selling Shareholders or any
broker or dealer effecting a transaction in the registered securities, whether
or not participating in a distribution, is required to deliver a prospectus. As
a result of such shares being registered under the Securities Act, holders who
subsequently resell such shares to the public may be deemed to be underwriters
with respect to such shares of Class B Common Stock, with the result that they
may be subject to certain
69
<PAGE>
statutory liabilities if the registration statement to which this Prospectus
relates is defective by virtue of containing a material misstatement or omitting
to disclose a statement of material fact. The Company has not agreed to
indemnify any Selling Shareholders regarding such liabilities.
SHARES ELIGIBLE FOR FUTURE SALE
The Subject Securities will be freely tradeable to the extent Offerees
reject the Rescission Offer. The Company's securities not subject to the
Rescission Offer were issued by the Company in reliance on exemptions from the
registration requirements of the Securities Act and are "restricted securities"
within the meaning of Rule 144 under the Securities Act. Any of the Company's
securities issued upon the exercise of options or warrants not subject to the
Rescission Offer will constitute "restricted securities." Restricted securities
may be resold publicly only following their effective registration under the
Securities Act or pursuant to an exemption from the registration requirements of
that act, such as Rule 144 thereunder.
In general, under Rule 144 as currently in effect, a person, including
an affiliate of the Company, who has beneficially owned restricted securities
for a period of at least one year from the date such restricted securities were
acquired from the Company or an affiliate, is entitled to sell, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) 1% of the
then-outstanding shares of Common Stock or (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain provisions relating to the
manner and notice of sale and the availability of current public information
about the Company.
Under Rule 144(k), if a period of at least two years has elapsed from
the date restricted securities were acquired from the Company or an affiliate, a
holder of such restricted securities who is not an affiliate of the Company at
the time of the sale and has not been an affiliate for at least three months
prior to the sale would be entitled to sell the shares immediately after the
date of this Prospectus without regard to the volume and manner of sale
limitations described above.
There has been no public trading market for the Company's Class A
and Class B Common Stock and there can be no assurance that one will develop.
Management will attempt to develop a public market in the Class A and Class B
Common Stock immediately after the closing of the Rescission Offer by means
of the OTC Bulletin Board Service ("OTCBB") by engaging market makers in the
shares in such a manner that will permit trading. Upon the completion of the
Rescission Offer, the Company intends to take the necessary actions to allow
its Class A Common Stock to be traded by means of the Nasdaq National Market
System ("NMS"). However, there can be no assurance that a market for the
Company's Class A Common Stock or Class B Common Stock will ever develop on
the OTCBB or the NMS. If any market is developed it should be assumed that
such market will be highly illiquid, sporadic and volatile. The sale of
substantial amounts of Class A or Class B Common Stock in the open market, or
the availability of shares for sale, may adversely affect the market price of
the Class A or Class B Common Stock and the ability of the Company to raise
funds through equity offerings in the future. See "Risk Factors -- Lack of
Public Market."
LEGAL MATTERS
The validity of the shares of Common Stock subject to the Rescission
Offer will be passed upon for the Company by Chamberlain, Hrdlicka, White,
Williams & Martin, Houston, Texas.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report (which contains an explanatory paragraph regarding the Company's
ability to continue as a going concern) appearing
70
<PAGE>
elsewhere herein and in the Registration Statement, and are included in reliance
upon such report given upon the authority of such firm as experts in auditing
and accounting.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended. The Company has
filed a Registration Statement on Form SB-2 (together with all amendments,
schedules and exhibits thereto, the "Registration Statement") with the
Commission under the Securities Act, with respect to the Common Stock offered
hereby. This Prospectus, which is included as part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted in accordance with the
rules and regulations of the Commission. Statements contained in this Prospectus
as to the contents of any contract or other document referred to herein are not
necessarily complete, and in each instance that a reference is made to a
contract or other document filed as an exhibit to the Registration Statement,
each such statement is qualified in all respects by such reference. A copy of
the Registration Statement may be examined without charge at the Commission's
principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or any part of the Registration
Statement may be obtained from the Public Reference Section of the Commission
upon payment of certain fees prescribed by the Commission. Copies of such
materials may also be obtained over the Internet at http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited and reported upon by its
independent public accounting firm and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
71
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CYNET, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants........ F-2
Consolidated Balance Sheets .............................. F-3
Consolidated Statements of Loss........................... F-4
Consolidated Statements of Capital Deficit................ F-5 - F-6
Consolidated Statements of Cash Flows .................... F-7
Notes to Consolidated Financial Statements................ F-8 - F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CyNet, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of CyNet, Inc. as
of December 31, 1998 and the related consolidated statements of loss, capital
deficit and cash flows for each of the two years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of CyNet, Inc. at December 31, 1998 and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred losses for the
years ended December 31, 1998 and 1997 totaling $4,356,640 and $7,762,863,
respectively, and at December 31, 1998 had a capital deficit of $12,218,072.
The Company will require additional working capital to develop and support
its technologies and business until the Company either (1) achieves a level
of revenues adequate to generate sufficient cash flows from operations; or
(2) receives additional financing necessary to support its working capital
requirements. Also, the Company is expected to issue a rescission offer
pertaining to (1) certain private placements of the Company's common and
preferred stock during 1996, 1997 and 1998 and (2) the issuance of certain
common and preferred stock and stock warrants issued for services provided
during the same periods. The potential liability of the Company, less
dividends paid and excluding interest, for the proposed rescission offer
totaled $13,980,009 and $13,950,009 as of December 31, 1998 and June 30,
1999, respectively. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
As discussed in Note 13, the Company's financial statements for the year
ended December 31, 1997 have been restated.
BDO SEIDMAN, LLP
Houston, Texas
April 23, 1999, except footnote 15,
which is as of September 13, 1999
F-2
<PAGE>
CYNET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash............................................................. $ 55,007 $ 120,018
Accounts receivable:
Trade, less allowance for doubtful accounts
of $99,104 and $142,180................................... 463,033 509,865
Affiliate (Note 6)............................................ - 86,740
Prepaid expenses:
Deferred offering costs (Note 3).............................. 2,078,825 2,078,825
Other......................................................... 53,843 97,244
------------ -------------
Total Current Assets.......................................... 2,650,708 2,892,692
Property and Equipment, less accumulated depreciation
and amortization (Note 4).......................................... 2,628,457 2,254,391
Organization costs, less accumulated
amortization of $28,578............................................ 18,548 -
------------ -------------
$ 5,297,713 $ 5,147,083
============ ============
LIABILITIES AND CAPITAL DEFICIT
Current Liabilities:
Accounts payable and accrued expenses ........................... $ 2,611,522 $1,599,263
Dividends payable ............................................... 535,167 560,769
Note Payable, including accrued interest (Note 5)................ 339,087 313,759
Accrued stock rights............................................. 50,000 50,000
------------ -------------
Total Current Liabilities........................................ 3,535,776 2,523,791
------------ -------------
Stock and warrants subject to rescission (Note 8):
Preferred stock - Series A......................................... 201,265 201,265
Preferred stock - Series B......................................... 259,923 229,923
Common stock - Class A............................................. 7,952,134 7,952,134
Common stock - Class B............................................. 5,365,047 5,365,047
Common stock warrants - Class A.................................... 201,640 201,640
------------ -------------
13,980,009 13,950,009
------------ -------------
Commitments and Contingencies (Notes 8 and 11)
Capital Deficit (Note 8):
Cumulative Convertible Preferred Stock:
Series A, non-voting, $2.00 and $1.43 stated value;
3,600,000 shares authorized; 103,500 shares
issued and outstanding......................................... - -
Series B, non-voting, $3.00 stated value; 2,000,000 shares
authorized; 87,349 shares issued and outstanding............... - 30,000
Common stock:
Class A voting, no par value; 40,000,000 shares authorized;
20,970,972 and 23,185,072 shares issued and outstanding ....... 4,116,703 6,331,703
Class B nonvoting, no par value; 20,000,000 shares authorized;
3,137,803 shares issued and outstanding ....................... 700,000 700,000
Outstanding warrants............................................. 362,500 362,500
Deficit.......................................................... (17,079,508) (18,433,153)
------------ -------------
(11,900,305) (11,008,950)
Less - treasury stock at cost, 18,041 shares of Class B
common stock.................................................. (317,767) (317,767)
------------ -------------
Total Capital Deficit............................................ (12,218,072) (11,326,717)
------------ -------------
$ 5,297,713 $ 5,147,083
============ ============
</TABLE>
F-3
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Years Ended Six Months Ended
December 31, June 30,
------------------------------- -------------------------------
1998 1997 1999 1998
------------ ------------- ------------- ------------
(Restated - (unaudited) (unaudited)
Note 13)
<S> <C> <C> <C> <C>
Revenues.......................................... $ 8,947,732 $ 4,960,355 $ 4,534,254 $ 4,243,585
Cost of revenues.................................. 6,069,184 4,490,505 2,322,766 3,092,689
------------ ------------- ------------- ------------
Gross profit...................................... 2,878,548 469,850 2,211,488 1,150,896
Selling, general and administrative
expenses (Note 1).............................. 6,107,978 7,517,935 2,937,633 2,564,922
Depreciation and amortization..................... 728,975 414,652 473,118 423,548
Write-down of long-lived assets
(Notes 13 and 14).............................. 271,957 496,133 - -
------------ ------------- ------------- ------------
Loss from operations.............................. (4,230,362) (7,958,870) (1,199,263) (1,837,574)
------------ ------------- ------------- ------------
Other income (expense):
Interest expense (Note 5)....................... (103,851) (2,000) (76,548) -
Interest income................................. 2,816 67,348 - 2,502
Other........................................... (25,243) (8,527) (52,232) -
------------ ------------- ------------- ------------
(126,278) 56,821 (128,780) 2,502
------------ ------------- ------------- ------------
Net loss before minority interest in
net loss of consolidated subsidiaries........... (4,356,640) (7,902,049) (1,328,043) (1,835,072)
Minority interest in net loss
of consolidated subsidiaries.................... - 139,186 - -
------------ ------------- ------------- ------------
Net loss before dividends on preferred stock...... (4,356,640) (7,762,863) (1,328,043) (1,835,072)
Dividends on preferred stock...................... (40,243) (739,204) (25,602) (27,367)
------------ ------------- ------------- ------------
Net loss applicable to common stockholders........ $ (4,396,883) $ (8,502,067) $ (1,353,645) $ (1,862,439)
============ ============= ============= ============
Net loss per common share - basic
and assuming dilution........................... $ (.19) $ (.60) $ (.05) $ (.08)
============ ============= ============= ============
Weighted average number of common
shares outstanding............................. 23,109,154 14,086,177 25,015,773 22,441,445
============ ============= ============= ============
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock
--------------------- ---------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 Shares Amount Shares Amount
---------- ------- ---------- ------
<S> <C> <C> <C> <C>
BALANCE, at December 31, 1996................................... 213,200 $ - - $ -
Reclassification of common stock and warrants
subject to rescission......................................... - - - -
Issuance of Class B common stock subject to rescission.......... - - - -
Issuance of Series A and B preferred stock issued
for compensation.............................................. 3,500 - 13,033 -
Issuance of Class A common stock for compensation
and services.................................................. - - - -
Issuance of Class B common stock for compensation
and services.................................................. - - - -
Issuance of Class B common stock on conversion of notes
payable and for loan commitment fees.......................... - - - -
Issuance of Series A preferred stock through a private
placement subject to rescission............................... 3,251,154 - - -
Issuance of Series B preferred stock through a private
placement subject to rescission............................... - - 1,755,541 -
Issuance of Class A common stock warrants for services.......... - - - -
Issuance of Class B common stock warrants for services.......... - - - -
Purchase of treasury shares, Class A common stock............... - - - -
Issuance of Class A common stock from treasury, 115,767
shares subject to rescission.................................. - - - -
Issuance of Class A common stock to purchase minority
interests..................................................... - - - -
Issuance of Class A common stock on conversion of
Series A preferred stock...................................... (3,359,354) - - -
Issuance of Class B common stock on conversion of
Series B preferred stock...................................... - - (1,691,225) -
Accrued dividends on preferred stock............................ - - - -
Net loss - Restated (Note 13)................................... - - - -
---------- ------- ---------- ------
BALANCE, at December 31, 1997 - Restated (Note 13).............. 108,500 - 77,349 -
Issuance of Class B common stock subject to rescission.......... - - - -
Issuance of Class A common stock................................ - - - -
Issuance of Series B preferred stock through a private
placement subject to rescission............................... - - 36,666 -
Issuance of Class A common stock warrants for services.......... - - - -
Issuance of Class B common stock warrants for services.......... - - - -
Purchase of treasury shares, Class B common stock............... - - - -
Issuance of Class A common stock from treasury,
10,000 shares subject to rescission........................... - - - -
Issuance of Class A common stock to purchase minority
interests..................................................... - - - -
Issuance of Class A common stock on conversion of
Series A preferred stock...................................... (5,000) - - -
Issuance of Class B common stock on conversion of
Series B preferred stock...................................... - - (26,666) -
Accrued dividends on preferred stock............................ - - - -
Net loss........................................................ - - - -
---------- ------- ---------- ------
BALANCE, at December 31, 1998................................... 103,500 $ - 87,349 $ -
========== ======= ========== ======
<CAPTION>
Class A Class B
Common Stock Common Stock
------------------------ ---------------------
Shares Amount Shares Amount
---------- ---------- --------- --------
BALANCE, at December 31, 1996................................... 12,600,000 $1,644,720 - $ -
Reclassification of common stock and warrants
subject to rescission......................................... - (93,720) - -
Issuance of Class B common stock subject to rescission.......... - - 25,000 -
Issuance of Series A and B preferred stock issued
for compensation.............................................. - - - -
Issuance of Class A common stock for compensation
and services.................................................. 810,000 578,000 - -
Issuance of Class B common stock for compensation
and services.................................................. - - 100,000 -
Issuance of Class B common stock on conversion of notes
payable and for loan commitment fees.......................... - - 800,000 700,000
Issuance of Series A preferred stock through a private
placement subject to rescission............................... - - - -
Issuance of Series B preferred stock through a private
placement subject to rescission............................... - - - -
Issuance of Class A common stock warrants for services.......... - - - -
Issuance of Class B common stock warrants for services.......... - - - -
Purchase of treasury shares, Class A common stock............... - - - -
Issuance of Class A common stock from treasury, 115,767
shares subject to rescission.................................. - - - -
Issuance of Class A common stock to purchase minority
interests..................................................... 2,328,940 885,936 - -
Issuance of Class A common stock on conversion of
Series A preferred stock...................................... 4,031,225 - - -
Issuance of Class B common stock on conversion of
Series B preferred stock...................................... - - 2,029,470 -
Accrued dividends on preferred stock............................ - - - -
Net loss - Restated (Note 13)................................... - - - -
---------- ---------- --------- --------
BALANCE, at December 31, 1997 - Restated (Note 13).............. 19,770,165 3,014,936 2,954,470 700,000
Issuance of Class B common stock subject to rescission.......... - - 154,000 -
Issuance of Class A common stock................................ 1,101,767 1,101,767 - -
Issuance of Series B preferred stock through a private
placement subject to rescission............................... - - - -
Issuance of Class A common stock warrants for services.......... - - - -
Issuance of Class B common stock warrants for services.......... - - - -
Purchase of treasury shares, Class B common stock............... - - - -
Issuance of Class A common stock from treasury,
10,000 shares subject to rescission........................... - - - -
Issuance of Class A common stock to purchase minority
interests..................................................... 92,640 - - -
Issuance of Class A common stock on conversion of
Series A preferred stock...................................... 5,500 - - -
Issuance of Class B common stock on conversion of
Series B preferred stock...................................... - - 29,333 -
Accrued dividends on preferred stock............................ - - - -
Net loss........................................................ - - - -
---------- ---------- --------- --------
BALANCE, at December 31, 1998................................... 20,970,072 $4,116,703 3,137,803 $700,000
========== ========== ========= ========
<CAPTION>
Outstanding
Warrants(1) Treasury Stock
---------------------- --------------------
Shares Amount Deficit Shares Amount
---------- --------- ------------ -------- ---------
BALANCE, at December 31, 1996................................... 738,000 $ 191,880 $ (4,428,687) 85,000 $(272,000)
Reclassification of common stock and warrants
subject to rescission......................................... - (191,880) - - (5,000)
Issuance of Class B common stock subject to rescission.......... - - - - -
Issuance of Series A and B preferred stock issued
for compensation.............................................. - - - - -
Issuance of Class A common stock for compensation
and services.................................................. - - - - -
Issuance of Class B common stock for compensation
and services.................................................. - - - - -
Issuance of Class B common stock on conversion of notes
payable and for loan commitment fees.......................... - - - - -
Issuance of Series A preferred stock through a private
placement subject to rescission............................... - - - - -
Issuance of Series B preferred stock through a private
placement subject to rescission............................... - - - - -
Issuance of Class A common stock warrants for services.......... 511,000 - - - -
Issuance of Class B common stock warrants for services.......... 2,200,000 362,500 - - -
Purchase of treasury shares, Class A common stock............... - - - 450,000 (450,000)
Issuance of Class A common stock from treasury, 115,767
shares subject to rescission.................................. - - - (115,767) -
Issuance of Class A common stock to purchase minority
interests..................................................... - - - - -
Issuance of Class A common stock on conversion of
Series A preferred stock...................................... - - - - -
Issuance of Class B common stock on conversion of
Series B preferred stock...................................... - - - - -
Accrued dividends on preferred stock............................ - - (491,075) - -
Net loss - Restated (Note 13)................................... - - (7,762,863) - -
---------- --------- ------------ -------- ---------
BALANCE, at December 31, 1997 - Restated (Note 13).............. 3,449,000 362,500 (12,682,625) 419,233 (727,000)
Issuance of Class B common stock subject to rescission.......... - - - - -
Issuance of Class A common stock................................ - - - - -
Issuance of Series B preferred stock through a private
placement subject to rescission............................... - - - - -
Issuance of Class A common stock warrants for services.......... 6,800,000 - - - -
Issuance of Class B common stock warrants for services.......... 350,954 - - - -
Purchase of treasury shares, Class B common stock............... - - - 18,041 -
Issuance of Class A common stock from treasury,
10,000 shares subject to rescission........................... - - - (419,233) 409,233
Issuance of Class A common stock to purchase minority
interests..................................................... - - - - -
Issuance of Class A common stock on conversion of
Series A preferred stock...................................... - - - - -
Issuance of Class B common stock on conversion of
Series B preferred stock...................................... - - - - -
Accrued dividends on preferred stock............................ - - (40,243) - -
Net loss........................................................ - - (4,356,640) - -
---------- --------- ------------ -------- ---------
BALANCE, at December 31, 1998................................... 10,599,954 $ 362,500 $(17,079,508) 18,041 $(317,767)
========== ========= ============ ======== =========
<CAPTION>
Total
------------
BALANCE, at December 31, 1996................................... $ (2,864,087)
Reclassification of common stock and warrants
subject to rescission......................................... (290,600)
Issuance of Class B common stock subject to rescission.......... -
Issuance of Series A and B preferred stock issued
for compensation.............................................. -
Issuance of Class A common stock for compensation
and services.................................................. 578,000
Issuance of Class B common stock for compensation
and services.................................................. -
Issuance of Class B common stock on conversion of notes
payable and for loan commitment fees.......................... 700,000
Issuance of Series A preferred stock through a private
placement subject to rescission............................... -
Issuance of Series B preferred stock through a private
placement subject to rescission............................... -
Issuance of Class A common stock warrants for services.......... -
Issuance of Class B common stock warrants for services.......... 362,500
Purchase of treasury shares, Class A common stock............... (450,000)
Issuance of Class A common stock from treasury, 115,767
shares subject to rescission.................................. -
Issuance of Class A common stock to purchase minority
interests..................................................... 885,936
Issuance of Class A common stock on conversion of
Series A preferred stock...................................... -
Issuance of Class B common stock on conversion of
Series B preferred stock...................................... -
Accrued dividends on preferred stock............................ (491,075)
Net loss - Restated (Note 13)................................... (7,762,863)
------------
BALANCE, at December 31, 1997 - Restated (Note 13).............. (9,332,189)
Issuance of Class B common stock subject to rescission.......... -
Issuance of Class A common stock................................ 1,101,767
Issuance of Series B preferred stock through a private
placement subject to rescission............................... -
Issuance of Class A common stock warrants for services.......... -
Issuance of Class B common stock warrants for services.......... -
Purchase of treasury shares, Class B common stock............... -
Issuance of Class A common stock from treasury,
10,000 shares subject to rescission........................... 409,233
Issuance of Class A common stock to purchase minority
interests..................................................... -
Issuance of Class A common stock on conversion of
Series A preferred stock...................................... -
Issuance of Class B common stock on conversion of
Series B preferred stock...................................... -
Accrued dividends on preferred stock............................ (40,243)
Net loss........................................................ (4,356,640)
------------
BALANCE, at December 31, 1998................................... $(12,218,072)
============
(1) Outstanding warrants consisted of the following at December 31:
1997 1998
---- ----
Shares Amount Shares Amount
--------- -------- ---------- --------
Class A common stock warrants 1,249,000 $201,645 8,049,000 $201,645
Class B common stock warrants 2,200,000 362,500 2,550,954 362,500
--------- -------- ---------- --------
3,449,000 $564,145 10,599,954 $564,145
========= ======== ========== ========
</TABLE>
F-5
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999 Series A Series B
AND 1998 (UNAUDITED): Preferred Stock Preferred Stock
-------------------- ----------------------
Shares Amount Shares Amount
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
BALANCE, at December 31, 1997 - Restated (Note 13)................... 108,500 $ - 77,349 $ -
Issuance of Class B common stock for compensation
and services subject to rescission................................. - - - -
Issuance of Class A common stock in connection with
the purchase of minority interests................................. - - - -
Issuance of Class A common on conversion of
Series A preferred stock........................................... (5,000) - - -
Issuance of Series B preferred stock through a private
placement subject to rescission.................................... - - 36,666 -
Issuance of Class B common on conversion of Series B
preferred stock.................................................... - - (26,666) -
Issuance of Class A common stock from treasury,
10,000 shares subject to rescission................................ - - - -
Purchase of treasury shares, Class B common stock previously
subject to rescission.............................................. - - - -
Issuance of Class A common stock warrants and Class B
common stock warrants for compensation and services................ - - - -
Accrued dividends on preferred stock................................. - - - -
Net loss............................................................. - - - -
--------- -------- -------- ----------
Balance, at June 30, 1998............................................ 103,500 $ - 87,349 $ -
========= ======== ====== ==========
Balance, at December 31, 1998........................................ 103,500 $ - 87,349 $ -
Issuance of Class A common stock..................................... - - - -
Reclassification of rescission liability (Note 6).................... - - - 30,000
Accrued dividends on preferred stock ................................ - - - -
Net loss............................................................. - - - -
--------- -------- -------- ----------
Balance, at June 30, 1999............................................ 103,500 $ - 87,349 $ 30,000
========= ======== ======== ==========
<CAPTION>
Class A Class B
Common Stock Common Stock
------------------------- --------------------
Shares Amount Shares Amount
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, at December 31, 1997 - Restated (Note 13)................... 19,770,165 $ 3,014,936 2,954,470 $ 700,000
Issuance of Class B common stock for compensation
and services subject to rescission................................. - - 154,000 -
Issuance of Class A common stock in connection with
the purchase of minority interests................................. 92,640 - - -
Issuance of Class A common on conversion of
Series A preferred stock........................................... 5,500 - - -
Issuance of Series B preferred stock through a private
placement subject to rescission.................................... - - - -
Issuance of Class B common on conversion of Series B
preferred stock.................................................... - - 29,333 -
Issuance of Class A common stock from treasury,
10,000 shares subject to rescission................................ - - - -
Purchase of treasury shares, Class B common stock previously
subject to rescission.............................................. - - - -
Issuance of Class A common stock warrants and Class B
common stock warrants for compensation and services................ - - - -
Accrued dividends on preferred stock................................. - - - -
Net loss............................................................. - - - -
----------- ----------- --------- ---------
Balance, at June 30, 1998............................................ 19,868,305 $ 3,014,936 3,137,803 $ 700,000
========== =========== ========= =========
Balance, at December 31, 1998........................................ 20,970,072 $ 4,116,703 3,137,803 $ 700,000
Issuance of Class A common stock..................................... 2,215,000 2,215,000 - -
Reclassification of rescission liability (Note 6).................... - - - -
Accrued dividends on preferred stock ................................ - - - -
Net loss............................................................. - - - -
----------- ----------- --------- ---------
Balance, at June 30, 1999............................................ 23,185,072 $ 6,331,703 3,137,803 $ 700,000
=========== =========== ========= =========
<CAPTION>
Outstanding
Warrants (1)
---------------------
Shares Amount Deficit
--------- ---------- --------------
<S> <C> <C> <C>
BALANCE, at December 31, 1997 - Restated (Note 13)................... 3,449,000 $ 362,500 $ (12,682,625)
Issuance of Class B common stock for compensation
and services subject to rescission................................. - - -
Issuance of Class A common stock in connection with
the purchase of minority interests................................. - - -
Issuance of Class A common on conversion of
Series A preferred stock........................................... - - -
Issuance of Series B preferred stock through a private
placement subject to rescission.................................... - - -
Issuance of Class B common on conversion of Series B
preferred stock.................................................... - - -
Issuance of Class A common stock from treasury,
10,000 shares subject to rescission................................ - - -
Purchase of treasury shares, Class B common stock previously
subject to rescission.............................................. - - -
Issuance of Class A common stock warrants and Class B
common stock warrants for compensation and services................ 2,330,954 - -
Accrued dividends on preferred stock................................. - - (27,367)
Net loss............................................................. - - (1,835,072)
---------- ---------- --------------
Balance, at June 30, 1998............................................ 5,779,954 $ 362,500 $ (14,545,064)
========= ========== ==============
Balance, at December 31, 1998........................................ 10,599,954 $ 362,500 $ (17,079,508)
Issuance of Class A common stock..................................... - - -
Reclassification of rescission liability (Note 6).................... - - -
Accrued dividends on preferred stock ................................ - - (25,602)
Net loss............................................................. - - (1,328,043)
---------- ---------- ---------------
Balance, at June 30, 1999............................................ 10,599,954 $ 362,500 $ (18,433,153)
========== ========== ===============
<CAPTION>
Treasury Stock
-------------------
Shares Amount Total
------ ----------- -------------
<S> <C> <C> <C>
BALANCE, at December 31, 1997 - Restated (Note 13)................... 419,233 $ (727,000) $ (9,332,189)
Issuance of Class B common stock for compensation
and services subject to rescission................................. - - -
Issuance of Class A common stock in connection with
the purchase of minority interests................................. - - -
Issuance of Class A common on conversion of
Series A preferred stock........................................... - - -
Issuance of Series B preferred stock through a private
placement subject to rescission.................................... - - -
Issuance of Class B common on conversion of Series B
preferred stock.................................................... - - -
Issuance of Class A common stock from treasury,
10,000 shares subject to rescission................................ (396,000) 386,000 386,000
Purchase of treasury shares, Class B common stock previously
subject to rescission.............................................. 18,041 - -
Issuance of Class A common stock warrants and Class B
common stock warrants for compensation and services................ - - -
Accrued dividends on preferred stock................................. - - (27,367)
Net loss............................................................. - - (1,835,072)
------ ----------- -------------
Balance, at June 30, 1998............................................ 41,274 $ (341,000) $ (10,808,628)
====== =========== =============
Balance, at December 31, 1998........................................ 18,041 $ (317,767) $ (12,218,072)
Issuance of Class A common stock..................................... - - 2,215,000
Reclassification of rescission liability (Note 6).................... - - 30,000
Accrued dividends on preferred stock ................................ - - (25,602)
Net loss............................................................. - - (1,328,043)
------ ----------- -------------
Balance, at June 30, 1999............................................ 18,041 $ (317,767) $ (11,326,717)
====== =========== =============
</TABLE>
(1) Outstanding warrants consisted of the following at June 30:
<TABLE>
<CAPTION>
1998 1999
-------------------- ----------------------
Shares Amount Shares Amount
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
Class A common stock warrants 3,249,000 $201,645 8,049,000 $201,645
Class B common stock warrants 2,530,954 362,500 2,550,954 362,500
--------- -------- ---------- --------
5,779,959 $564,145 10,599,954 $564,145
========= ======== ========== ========
</TABLE>
F-6
<PAGE>
CYNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- -----------------------------
1998 1997 1999 1998
-------------- ------------- ------------- ------------
(Restated - (unaudited) (unaudited)
(Note 13)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $ (4,356,640) $ (7,762,863) $ (1,328,043) $ (1,835,072)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization....................... 728,975 414,652 473,118 423,548
Write-down of long-lived assets..................... 271,957 496,133 - -
Loss on disposal of equipment....................... 25,243 - 50,176 -
Property transferred for compensation............... 67,283 - - -
Forgiveness of receivable as compensation........... 121,043 - - -
Minority interest in net income
of consolidated subsidiaries...................... - (139,186) - -
Provision for bad debts............................. 349,327 245,638 92,304 240,430
Stock issued for compensation and services.......... - 266,999 - -
Stock rights and warrants issued for loan
costs and services................................ - 60,000 - -
Changes in assets and liabilities:
Accounts receivable............................... (658,594) (390,602) (225,876) (379,600)
Prepaid expenses and other assets................. 54,926 (1,397,627) (43,401) (81,636)
Accounts payable and accrued expenses............. 1,612,687 582,055 (1,037,587) 984,950
-------------- ------------- ------------- ------------
Net cash used in operating activities................ (1,783,793) (7,624,801) (2,019,309) (647,380)
-------------- ------------- ------------- ------------
Cash flows from investing activities:
Purchase of property and equipment................... (867,835) (3,172,458) (167,680) (386,673)
Proceeds from sale of property and equipment......... 55,250 - 37,000 -
-------------- ------------- ------------- ------------
Net cash used in investing activities................ (812,585) (3,172,458) (130,680) (386,673)
-------------- ------------- ------------- ------------
Cash flows from financing activities:
Issuance of preferred stock - Series A............... - 6,462,308 - -
Issuance of preferred stock - Series B............... 110,000 5,266,623 - 110,000
Issuance of common stock - Class A................... 1,101,767 - 2,215,000 -
Issuance of common stock - Class B................... - 50,000 - -
Dividends paid....................................... - (248,128) - -
Repayment of note payable to stockholder............. - (59,680) - -
Proceeds from note payable........................... 600,000 - - -
Payments on note payable............................. (260,913) - - -
Purchase of treasury stock........................... (45,102) (450,000) - (45,102)
Sale of treasury stock............................... 429,233 144,000 - 406,000
-------------- ------------- ------------- ------------
Net cash provided by financing activities............ 1,934,985 11,165,123 2,215,000 470,898
-------------- ------------- ------------- ------------
Net increase (decrease) in cash......................... (661,393) 367,864 65,011 (563,155)
Cash, beginning of period............................ 716,400 348,536 55,007 716,400
-------------- ------------- ------------- ------------
Cash, end of period.................................. $ 55,007 $ 716,400 $ 120,018 $ 153,245
============== ============= ============= ============
</TABLE>
F-7
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of CyNet, Inc., its 50% (prior to December 1, 1997) owned limited
liability companies ("LLCs") and its wholly-owned subsidiary Worldwide
Marketing, Inc. formed April 24, 1998. Pursuant to a private placement
memorandum, the Company acquired the remaining 50% ownership in the LLCs as
of December 1, 1997 (See Note 7). CyNet, Inc.'s profit (loss) participation
in the LLCs ranged from 50% to 60% prior to the purchase of the minority
interests in the LLCs and 100% thereafter. All significant intercompany
accounts and transactions have been eliminated. CyNet, Inc., Worldwide
Marketing, Inc. and the LLCs are referred to herein as the Company. During
1998, the Company dissolved each of the LLCs.
The Company is an Internet business solutions provider. The
Company's products and services are offered through messaging which includes
Fax, Data, Voice, E-Mail and Mobile Messaging, and Internet services which
includes custom application development, e-commerce development, web content
creation, web hosting and Internet access.
The Company is a Texas corporation and was founded in April 1995 to
provide fax services for business-to-business communication. The Company
capitalized on the dramatic increase in the usage of third-party fax services
and created a niche market for itself with its HYPERCAST fax broadcast
desktop client software and service. In 1997, the Company introduced
HYPERLINE, its point-to-point desktop software and fax service in order to
expand its existing fax service.
Having built a reputation for high performance in communications
through its fax services, the Company responded to the rapid growth and
popularity of e-mail and the Internet as a primary communications medium and
set out to become a full service Internet messaging provider. In 1998, the
Company added to its product offering HYPERWEB, its e-mail-to-fax service;
HYPERMAIL, its fax-to-e-mail service; WEBCAST, its e-mail broadcast service,
TELECAST, its voice broadcast service; and HYPERCOMM, its teleconferencing
service. To further enhance its messaging services, the Company, through its
subsidiary Worldwide Marketing Services, Inc., also added enhancement
services such as list procurement, full-service graphic design and copy
development services for its customers. These additional services enabled the
Company to sell complete messaging solutions with end-to-end control of the
solution.
In July 1999, the Company acquired CyNet Interactive, LLC from CyNet
Holdings, LLC, a 56.2% stockholder of the Company, prior to the proposed
rescission offer and rescission financing, (see Note 15). The acquisition of
CyNet Interactive, LLC allowed the Company to expand its messaging and
broadcast enhancement services to include web site design, Internet
application development for e-commerce and other Internet-based applications,
and web site hosting. In July 1999, the Company entered into a strategic
alliance with IXC Communications to enable the Company to further expand its
products and services to include Internet access for business customers. This
alliance with IXC Communications enables the Company to provide complete,
"end-to-end" Internet business solutions just as it is able to provide
complete "end-to-end" messaging business solutions.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements as of June 30, 1999 and for
the six months ended June 30, 1999 and 1998 are unaudited. In the opinion of
the Company's management, such unaudited consolidated financial statements
include all adjustments necessary, which include only normal recurring items,
to present fairly the information set forth therein. Results for the interim
periods are not necessarily indicative of the results that may be expected
for any other interim period or a full year.
F-8
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line method
for financial reporting purposes and accelerated methods for income tax
purposes. Maintenance and repairs are charged to operations as incurred.
The Company reviews property and equipment for impairment whenever
events or changes in circumstances indicate the carrying value of an asset
may not be fully recoverable.
INCOME TAXES
Deferred taxes result from temporary differences between the
financial statement and income tax bases of assets and liabilities (see Note
9). The Company adjusts the deferred tax asset valuation allowance based on
judgments as to future realization of the deferred tax benefits supported by
demonstrated trends in the Company's operating results.
The LLCs are not subject to state and federal income taxes.
Accordingly, the operating results of each respective LLC are reported in the
individual state and federal tax returns of the member.
RESEARCH AND DEVELOPMENT
Expenditures for research and development of telecommunication
technology as it relates to fax broadcasting and to various customer
interface and application needs are charged to expense as incurred. For the
years ended December 31, 1998 and 1997, research and development expenditures
were approximately $398,000 and $419,000, respectively.
REVENUE RECOGNITION
Messaging and Internet service revenues are recognized as services
are performed. Revenues from sales of customer lists and other related
services are recognized when the list is provided, or the other services are
performed.
LOSS PER COMMON SHARE
The Company is required to provide basic and dilutive earnings
(loss) per common share information.
The basic net loss per common share is computed by dividing the net
loss applicable to common stockholders by the weighted average number of
common shares outstanding.
Diluted net loss per common share is computed by dividing the net
loss applicable to common stockholders, adjusted on an "as if converted"
basis, by the weighted average number of common shares outstanding plus
potential dilutive securities. For the years ended December 31, 1998 and
1997, potential dilutive securities had an anti-dilutive effect and were not
included in the calculation of diluted net loss per common share.
These securities at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
--------- ---------
(shares) (shares)
<S> <C> <C>
Conversion of Series A preferred stock - Class A.................... 103,500 119,350
Conversion of Series B preferred stock - Class B.................... 87,349 85,084
Incentive stock option plan - Class A............................... 1,465,563 -
Stock warrants outstanding - Class A................................ 8,049,000 1,249,000
Stock warrants outstanding - Class B ............................... 2,550,954 2,200,000
---------- ---------
12,256,366 3,653,434
========== =========
</TABLE>
F-9
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
STOCK OPTIONS AND WARRANTS
The Company accounts for stock options and warrants issued to
employees in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. For financial statement disclosure
purposes and issuance of options and warrants to non-employees for services
rendered, the Company follows statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation.
RISKS AND UNCERTAINTIES
The Company is subject to the business risks inherent in the
telecommunications industry. These risks include, but are not limited to, a
high degree of competition within the telecommunications industry and
continuous technological advances. Future technological advances in the
telecommunications industry may result in the availability of new services or
products that could compete with the enhanced messaging and Internet services
currently provided by the Company or decreases in the cost of existing
products or services that could enable the Company's established or potential
customers to fulfill their own needs for enhanced messaging and Internet
services more cost efficiently. There can be no assurance that the Company
would not be adversely affected in the event of such technological change.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments include accounts receivable,
accounts payable and a note payable. The fair market value of accounts
receivable, accounts payable and note payable approximates their carrying
values because their maturities are generally less than one year in duration.
Accounts receivable subject the Company to a concentration of credit risk
with customers in the retail sector. The risk is spread over a large number
of geographically dispersed customers.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles which requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2001 to
affect its financial statements.
Effective for all fiscal years beginning after December 31, 1998,
SOP 98-5, "Reporting on the Costs of Start-up Activities", requires all
start-up and organizational costs to be expensed as incurred. It also
requires all remaining historically capitalized amounts of these costs
existing at the date of adoption to be expensed and reported as the
cumulative effect of a change in accounting principles. The Company adopted
SOP 98-5 in the first quarter of 1999 and it did not have a material effect
on its financial statements.
F-10
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN
For the years ended December 31, 1998 and 1997, the Company incurred
net losses totaling $4,356,640 and $7,762,863, respectively, and at December
31, 1998 had a capital deficit of $12,218,072. Because of these recurring
losses, the Company will require additional working capital to develop and
support its technologies and business until the Company either (1) achieves a
level of revenues adequate to generate sufficient cash flows from operations;
or (2) receives additional financing necessary to support the Company's
working capital requirements.
During 1996, 1997 and 1998, the Company sold certain common and
preferred stock which were not registered pursuant to the federal and state
securities laws, but were sold in a series of three private placement
offerings in reliance upon the exemptions from registration afforded by (i)
Sections 3(b) and 4(2) of the Securities Act of 1933, as amended, and
Regulation D promulgated thereunder, and (ii) various state limited offering
provisions, respectively. In addition, the Company issued certain common and
preferred stock and stock warrants for services provided to the Company
during the same periods.
However, the Company has been advised that under the integration
provisions of Regulation D, the private placement offerings may be viewed by
the Securities and Exchange Commission as one continuous offering and, as
such, may not have been conducted in compliance with all applicable
Regulation D limited offering conditions. If the private placement offerings
were not conducted in compliance with the securities laws, the purchasers of
the common and preferred stock would have the right to have such securities
repurchased by the Company for an amount equal to the purchase price paid
less any dividends received plus interest, or if the common and preferred
stock have been disposed of by the holder at a loss, the difference between
the purchase price and the price received upon disposal less dividends
received plus interest. In addition, the Company has determined that certain
issuances of common and preferred stock and stock warrants issued for
services are also subject to rescission for an amount equal to the estimated
value of services rendered to the Company. As a result, the Company has
elected to make a rescission offer to the holders of certain issuances of
common and preferred stock and stock warrants. The Company originally filed a
registration statement in August 1998 and intends to file an amended
registration statement with the Securities and Exchange Commission that
contains the proposed rescission offer as previously discussed and provide
for the registration of the Company's common stock and the resale of certain
common stock by certain selling stockholders. The Company expects the
rescission offer to be effective by the fall of 1999, at which time the offer
will be outstanding for thirty days. The potential liability of the Company,
less dividends paid and excluding interest, for the proposed rescission offer
totaled $13,980,009 and $13,950,009 as of December 31, 1998 and June 30,
1999, respectively. It is management's opinion that substantially all the
existing stockholders and warrant holders subject to rescission will elect to
retain their stock ownership and stock warrants, and the proposed rescission
offer will not have a material adverse effect on the Company's financial
position. See Note 15 for discussion regarding the status and proposed
commitment for stand-by investors.
Regarding any funding of the rescissions liability that may be paid
out by the Company to stockholders and warrant holders accepting the
rescission offer, the Company has arranged for stand-by investors. As of June
30, 1999, the Company had commitments from stand-by investors of $2,750,000,
a portion which has been placed in an escrow account. See Note 15 for
discussion regarding the status and proposed commitment by stand-by investors
subsequent to June 30, 1999.
Additionally, the Company intends to raise additional working
capital through either private placements or public offerings. As of June 30,
1999, the Company has a remaining commitment of $6,274,000 from CyNet
Holdings, LLC, the majority stockholder of CyNet, Inc. for additional working
capital needs. See Notes 6 and 15 for discussion of the terms of the CyNet
Holdings, LLCs stock subscription agreement and status of the funding
commitment.
F-11
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
There are no assurances that (1) the existing stockholders and
warrant holders subject to rescission will elect to retain their stock
ownership and stock warrants and (2) the Company will be able to raise
additional working capital through either private placements or public
offerings. To the extent that funds generated from operations, stand-by
investors and any private placements or public offerings are insufficient,
the Company will have to raise additional working capital. No assurance can
be given that additional financing will be available, or if available, will
be on terms acceptable to the Company. If adequate working capital is not
available the Company may be required to curtail its operations.
This condition raises substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern.
NOTE 3 - DEFERRED OFFERING COSTS
As of December 31, 1998 and June 30, 1999, the Company has incurred
expenses totaling $2,078,825 in connection with the private placement
transactions (See Note 8) which have been recorded as prepaid expenses. The
amount consists of cash payments totaling $1,296,305, of which $665,000 was
paid to a company owned by a stockholder, Class A common stock and Class B
common stock warrants, with a value of $509,765 and $178,500, respectively,
issued to a stockholder and $94,255 of various expenses incurred prior to the
year ended December 31, 1997.
These deferred offering costs are subject to adjustment pending the
outcome of the Company's rescission offer. Accordingly, for any portion of
the proposed rescission offer that is accepted by the stockholders, a
pro-rata share of these costs will be charged to operations upon the
stockholders' election. For any portion of the rescission offer that is
rejected by the stockholders, a pro-rata share of these costs will be
reclassed as a reduction of capital.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, JUNE 30,
LIVES (YEARS) 1998 1999
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Computer equipment............................... 3-5 $ 1,606,955 $ 1,573,162
Computer software................................ 5 892,652 951,589
Furniture and fixtures........................... 7 537,457 556,523
Telephone equipment.............................. 3-5 294,881 298,408
Automobiles...................................... 5 152,613 152,613
Leasehold improvements........................... 5 205,533 213,292
------------- -------------
3,690,091 3,745,587
Less - accumulated depreciation
and amortization............................. (1,061,634) (1,491,196)
------------- -------------
$ 2,628,457 $ 2,254,391
============= =============
</TABLE>
F-12
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
NOTE 5 - NOTE PAYABLE
In August 1998, the Company entered into a five-year agreement with
an early cancellation provision to sell certain of its eligible accounts
receivable, on a revolving basis to a non-affiliated entity. The Company
continues to service the receivables and maintains an allowance for doubtful
accounts based upon the expected collectibility of all accounts receivables,
including the receivables sold. The Company agreed to pay a finance charge on
the accounts receivable sold at rates ranging from 5% to 34.01% based on days
the receivables are outstanding. However, the Company has not been remitting
the collection of the sold accounts receivable to the factoring agent and has
been using the agreement as a line of credit and is paying finance charges of
approximately 5% per month (60% annually) on the advances. For the year ended
December 31, 1998 and six months ended June 30, 1999, the Company incurred
finance charges of $66,877 and $76,548, respectively. As of December 31, 1998
and June 30, 1999 the note payable was $339,087 and $313,759, respectively,
including accrued interest of $66,877 and $26,548.
NOTE 6 - RELATED PARTY TRANSACTIONS
Related party transactions for the year ended December 31, 1998 are
as follows:
(a) In July 1998, the Company entered into a stock subscription
agreement with CyNet Holdings, LLC, an entity that beneficially
owns approximately 56.2% of the Company's Class A common stock
to finance the Company's capital requirements. The agreement
allows the related entity to purchase up to 10,000,000 shares
of the Company's Class A common stock at a $1.00 per share and
a five year warrant to purchase up to 4,800,000 shares of Class
A common stock at $1.00 per share for $10. The agreement was
subsequently amended to extend the duration of the agreement to
December 31, 1999 and permit the issuance of Class B common
stock to the extent that no authorized Class A common stock is
available. The Company determined the warrants had no value on
issuance under the minimum value method. As of December 31,
1998, the related entity had purchased 1,511,000 shares of
Class A common stock of which 409,233 shares were sold from
treasury and 1,101,767 were newly issued shares, and purchased
an additional 2,215,000 shares as of June 30, 1999. See Note 15
for status of the funding commitment.
In addition, in April 1999 CyNet Holdings, LLC acquired 10,000
shares of Series B preferred stock from a stockholder of the
Company for $30,000 in accordance with a settlement agreement
with the stockholder. Accordingly, the acquired shares are no
longer subject to the rescission offer.
(b) In April 1998, stockholders received 100,000 Class A common
stock warrants and 255,954 Class B common stock warrants for
services rendered. The warrants vest immediately, are
exercisable at $1.00 per share and expire five years from the
date of issue. The Company determined the warrants had no value
on issuance under the minimum value method.
(c) In April 1998, the Company transferred certain property with a
net book value of $67,283 to the former president of the
Company and recorded such transfer as compensation. This amount
is in addition to compensation paid in accordance with this
individual's employment agreements.
(d) On August 31, 1998, in accordance with a settlement agreement
and mutual release between the Company and its former
president, the Company forgave a receivable totaling $121,043
due from this individual (see Note 10).
F-13
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
Related party transactions for the year ended December 31, 1997 are
as follows:
(a) A stockholder received 500,000 shares of Class A common stock
valued at $500,000 and a warrant to purchase 1,050,000 shares
of Class B common stock valued at $178,500 for assistance with
the private placements of preferred stock. The warrant vests
immediately, is exercisable at $1.00 per share and expires
three years from the date of issuance. Subsequent to December
31, 1998, the terms of the warrant issued was modified (see
Note 15).
(b) The Company issued a warrant to a stockholder for 1,150,000
shares of Class B common stock for assistance in raising
capital for the formation of the limited liability companies.
At December 31, 1996, the Company had recorded a liability of
$184,000, the estimated fair market value of the warrant. The
warrant vests immediately and is exercisable at $1.00 per share
and expires three years from issuance. The stockholder
subsequently assigned his right to receive such warrants to
certain individuals and entities. Subsequent to December 31,
1998, the terms of the warrant issued was modified (see
Note 15).
(c) In December 1997, a company owned by a stockholder, received
200,000 shares of Class A common stock valued at $78,000 in
consideration for the termination of a distribution agreement.
(d) The Company paid consulting fees totaling $313,000 to a company
owned by a stockholder.
(e) A stockholder of the Company transferred certain intellectual
property rights to the Company for a one-time payment of
$250,000.
(f) The Company paid $893,527 to a company owned by a stockholder
and to the individual for services rendered in connection with
the private placements and for other services provided.
(g) The Company purchased 450,000 shares of Class A common stock
for $1.00 per share and recorded such amount as treasury stock.
Related party transactions for the six months ended June 30, 1999
are as follows:
(a) The Company provided systems engineering and consulting
services totaling $86,740 to CyNet Interactive, a wholly-owned
subsidiary of CyNet Holdings, LLC which remained unpaid at June
30, 1999 (see Note 15).
NOTE 7 - PURCHASE OF MINORITY INTEREST OF THE LIMITED LIABILITY COMPANIES
Effective December 1, 1997, pursuant to a private placement
memorandum, the Company acquired the remaining 50% ownership in the LLCs by
issuance of 2,328,940 shares of the Company's Class A common stock. At the
time of formation of the LLCs, the holders of the minority interest paid
approximately $1,941,000 for such interest which included a conversion
feature of 1.2 shares of the Company's Class A common stock for every dollar
invested by the LLC member upon certain events, as defined. Based on an
independent third party appraisal of the Company's Class A common stock,
there was no additional consideration given above the original conversion
feature for the purchase of the minority interest. Accordingly, the purchase
of the minority interest of the LLCs was accounted for at book value. In
January 1998, the Company issued an additional 92,640 shares of Class A
common stock in connection with the purchase of the minority interest of the
LLCs.
F-14
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
NOTE 8 - CAPITAL
COMMON STOCK
The Company is authorized to issue up to 60,000,000 shares of its no
par value common stock of which 40,000,000 shares have been designated as
Class A voting common stock and 20,000,000 shares have been designated as
Class B non-voting common stock. The holders of shares of Class A common
stock are entitled to one vote for each share on all matters submitted to a
vote of stockholders. Holders of Class B common Stock are entitled under the
Texas Business Corporation Act to vote in connection with the voluntary
dissolution of the Company but have no voting privileges with respect to
other matters. The holders of both Class A and Class B common stock are
entitled to receive such dividends, if any, as may be declared by the Board
of Directors from time to time out of legally available funds. Upon
liquidation or dissolution of the Company, the holders of both Class A and
Class B common stock are entitled to share ratably in all assets of the
Company that are legally available for distribution, after payment of all
debts and other liabilities and subject to the priority rights of any holders
of preferred stock then outstanding. Holders of Class A and Class B common
stock have no preemptive rights to acquire new securities issued by the
Company and have no rights to convert their common stock into any other
securities of the Company.
CLASS A COMMON STOCK
During the year ended December 31, 1998 and the six months ended June
30, 1999, the Company sold 1,511,000 and 2,215,000 shares of common stock,
respectively, at $1.00 per share to CyNet Holdings, LLC, a related entity of
which 409,233 were issued from treasury stock for the year ended December 31,
1998. In addition, the Company sold 10,000 shares of Class A common stock from
treasury stock for $2.00 a share, which are subject to the proposed rescission
offer. During the year ended December 31, 1997, the Company purchased 450,000
shares of Class A common stock of which 115,767 shares were resold for net cash
proceeds of $144,000, which are subject to the proposed rescission offer.
During the years ended December 31, 1998 and 1997, the Company issued
Class A common stock for certain services, rights and for the purchase of the
minority interest in the LLCs as follows:
(a) In January 1998, the Company issued 92,640 shares of Class A
common stock in connection with the purchase of the minority
interest of the LLCs, see Note 7.
(b) In December 1997, the Company issued 2,328,940 shares of Class A
common stock at the market value of $0.39 per share based on an
independent appraisal for the purchase of the minority interest of
the LLCs. This transaction was recorded at book value, see Note 7.
(c) In December 1997, the Company issued 110,000 shares of Class A
common stock valued at $42,900 to a sales consultant for services,
which are subject to the proposed rescission offer.
(d) In December 1997, the Company issued 200,000 shares of Class A
common stock valued at $78,000 as consideration for termination of
a distribution agreement.
(e) During 1997, the Company issued 500,000 shares of Class A common
stock valued at $500,000 to a stockholder for services in
connection with certain private placements of preferred stock.
F-15
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
CLASS B COMMON STOCK
During the year ended December 31, 1998, the Company purchased 18,041
shares of Class B common stock for $45,102 which are subject to the proposed
rescission offer.
During the year ended December 31, 1998, the Company issued 154,000
shares of Class B common stock valued at $60,000. The stock rights were accrued
at December 31, 1997 for consulting services and are subject to the proposed
rescission offer.
During the year ended December 31, 1997, the Company sold 25,000 shares
of Class B common stock for $2.00 per share for net cash proceeds of $50,000,
which are subject to the proposed rescission offer.
During the year ended December 31, 1997, the Company issued Class B
common stock for services, conversion of notes payable and commitment fees as
follows:
(a) The Company issued 400,000 shares of Class B common stock valued
at $400,000 for the conversion of a $100,000 note payable, of
which the original principal of $100,000 is subject to the
proposed rescission offer.
(b) The Company issued 400,000 shares of Class B common stock valued
at $400,000 for a loan commitment fee.
(c) The Company issued 100,000 shares of Class B common stock valued
at $100,000 for services rendered, which is subject to the
proposed rescission offer.
At December 31, 1998 and June 30, 1999, the Company had common stock
reserved for future issuance as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---- ----
(shares) (shares)
<S> <C> <C>
Conversion of Series A preferred stock to Class A................... 103,500 103,500
Conversion of Series B preferred stock to Class B................... 87,349 87,349
Stock rights - Class A.............................................. 50,000 50,000
Incentive stock option plan - Class A............................... 1,465,563 1,915,313
Stock warrants outstanding - Class A................................ 8,049,000 8,049,000
Stock warrants outstanding - Class B................................ 2,550,954 2,550,954
---------- ----------
12,306,366 12,756,116
========== ==========
</TABLE>
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of no par
value preferred stock. The preferred stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting rights
(including the right to vote as a series on a particular matter), preferences as
to dividends and liquidation, conversion, redemption rights and sinking fund
provisions.
F-16
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
SERIES A PREFERRED STOCK
The Company is authorized to issue a total of 3,600,000 shares of
Series A preferred stock. The preferred stock is non-voting, has a $2.00 per
share stated value and has an annualized dividend rate of $0.24 per share.
Attributes of the Series A preferred stock are discussed below:
RANKING. The Series A preferred stock is senior to the Company's common
and Series B preferred stock with respect to dividends and rights upon
liquidation or dissolution of the Company. As long as any Series A preferred
stock is outstanding, the Company will not be entitled to authorize or issue any
class of securities that is senior to or on parity with the Series A preferred
stock without the approval of holders of at least 66-2/3% of the Series A
preferred stock.
VOTING RIGHTS. Holders of Series A preferred stock are not entitled
to vote.
DIVIDEND RIGHTS. The holders of Series A preferred stock are entitled
to receive out of funds of the Company legally available, dividends at an annual
rate of $0.24 per share, payable semi-annually in arrears in two equal
installments of $0.12 in June and December of each year. Dividends accrue and
accumulate from the date of first issuance and are paid to holders of record as
they appear on the books of the Company as of the record date of the last day of
May and November in each year which immediately precedes each respective
dividend payment date. Accumulation of dividends does not bear interest. So long
as the Series A preferred stock is outstanding, the Company may not declare or
pay any dividends on the common stock or other stock unless the full cumulative
dividends on the Series A preferred stock have been paid in full.
CONVERSION AND MANDATORY CONVERSION. Shares of Series A preferred stock
are convertible by the holder at any time (a) on or after the date of issuance
and before November 1, 1997 into shares of Class A common stock at a conversion
rate of 1.2 shares of Class A common stock for each share of Series A preferred
stock tendered; and (b) after November 1, 1997 and before September 1, 1998 at a
conversion rate of 1.1 shares of Class A common stock for each share of Series A
preferred stock (c) after September 1, 1998 the conversion rate is 1.0. Any
accrued and unpaid dividends will be paid to holders of the Series A preferred
stock at the time of conversion. The Company at its sole discretion and option
has the right to require that holders of Series A preferred stock to convert
their shares to Class A common stock at any time on or after January 1, 1999. In
the event of this mandatory conversion election by the Company, holders of
Series A preferred stock will receive one share of Class A common stock for each
share of Series A preferred stock.
LIQUIDATION RIGHTS. In the event of liquidation or dissolution of the
Company, whether voluntary or otherwise, after payment or provision for payment
of the debts and other liabilities of the Company, the holders of the Series A
preferred stock are entitled to receive, out of the remaining net assets of the
Company available for distribution to stockholders before any distribution or
payment made to holders of common stock or Series B preferred stock other junior
capital stock, the Series A preferred stock stated value of $2.00 per share plus
any accrued and unpaid dividends. Upon payment of the full amount of the Series
A preferred stock stated value plus any unpaid dividends, the holders of Series
A preferred stock shall not be entitled to any further participation in any
distribution of assets of the Company.
During the year ended December 31, 1997, the Company sold 3,251,154
shares of Series A preferred stock for prices between $1.43 and $2.00 per share
for net cash proceeds of $6,462,308 and issued 3,500 shares valued at $7,000 for
compensation. From inception to December 31, 1997, a total of 3,467,854 shares
were issued of which 5,000 and 3,359,354 shares were converted into 5,500 and
4,031,225 shares of Class A common stock during the years ended December 31,
1998 and 1997, respectively, at a conversion rate of 1.1 and 1.2 shares of Class
A common stock for each share of Series A preferred stock, respectively.
F-17
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
SERIES B PREFERRED STOCK
The Company is authorized to issue a total of 2,000,000 shares of
Series B cumulative convertible preferred stock. The preferred stock is
non-voting, has a $3.00 per share stated value and has an annualized dividend
rate of $0.30 per share. Attributes of the Series B preferred stock are
discussed below:
RANKING. The Series B preferred stock is junior to the Series A
preferred stock and senior to the Company's common stock with respect to
dividends and rights upon liquidation or dissolution of the Company. As long as
any Series B preferred stock is outstanding, the Company will not be entitled to
authorize or issue any class of securities that is senior to or on parity with
the Series B preferred stock without the approval of holders of at least 66-2/3%
of the Series B preferred stock.
VOTING RIGHTS. Holders of Series B preferred stock are not entitled
to vote.
DIVIDEND RIGHTS. The holders of Series B preferred stock are entitled
to receive out of funds of the Company legally available, dividends at an annual
rate of $0.30 per share, payable semi-annually in arrears in two equal
installments of $0.15 in June and December of each year. Dividends accrue and
accumulate from the date of first issuance and are paid to holders of record as
they appear on the books of the Company as of the record date of the last day of
May and November in each year which immediately precedes each respective
dividend payment date. Accumulation of dividends will not bear interest. So long
as the Series A or B preferred stock is outstanding, the Company may not declare
or pay any dividend on the common stock or other capital stock unless the full
cumulative dividends on the Series A and Series B preferred stock have been paid
in full.
CONVERSION AND MANDATORY CONVERSION. Shares of Series B preferred stock
are convertible by the holder at any time (a) on or after the date of issuance
and before November 1, 1997 into shares of Class B non-voting common stock at a
conversion rate of 1.2 shares of such common stock for each share of Series B
preferred stock; and (b) after November 1, 1997 and before September 1, 1998 at
a conversion rate of 1.1 shares of Class B non-voting common stock for each
share of Series B preferred stock after September 1, 1998 the conversion rate is
1.0. Any accrued and unpaid dividends will be paid to holders of the Series B
preferred stock at the time of conversion. The Company at its sole discretion
and option has the right to require that holders of Series B preferred stock to
convert their shares to Class B non-voting common stock at any time on or after
January 1, 1999. In the event of this mandatory conversion election by the
Company, holders of Series B preferred stock will receive one share of Class B
non-voting common stock for each share of Series B preferred stock.
LIQUIDATION RIGHTS. In the event of liquidation or dissolution of the
Company, whether voluntary or otherwise, after payment or provision for payment
of the debts, other liabilities of the Company, and Series A preferred
shareholders, the holders of the Series B preferred stock are entitled to
receive, out of the remaining net assets of the Company available for
distribution to stockholders before any distribution or payment made to holders
of common stock or other junior capital stock, the Series B preferred stock
stated value of $3.00 per share plus any accrued and unpaid dividends. Upon
payment of the full amount of the Series B preferred stock stated value plus any
unpaid dividends, the holders of Series B preferred stock shall not be entitled
to any further participation in any distribution of assets of the Company.
During the year ended December 31, 1998, the Company sold 36,666 shares
of Series B preferred stock for $3 per share for net cash proceeds of $110,000.
Of these shares, 26,666 shares were converted into 29,333 shares of Class B
common stock during the year ended December 31, 1998 at a conversion rate of 1.1
shares of Class B common stock for each share of Series B preferred stock.
During the year ended December 31, 1997, the Company sold 1,755,541
shares of Series B preferred stock for $3.00 per share for net cash proceeds of
$5,266,623 and granted 13,033 shares valued at $39,099 as compensation. Of these
shares, 1,691,225 shares were converted into 2,029,470 shares of Class B common
stock during the year ended December 31, 1997 at a conversion rate of 1.2 shares
of Class B common stock for each share of Series B preferred stock.
F-18
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
PROPOSED RESCISSION OFFER
The Class A and Class B common stock and Series A and Series B
preferred stock issuances were sold in a series of private placement offerings
in reliance upon the exemptions from registration afforded by (i) Sections 3(b)
and 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder and (ii) various state limited offering provisions, respectively. The
stock issuances were not registered pursuant to the federal and state securities
laws. In addition, the Company issued certain common and preferred stock and
stock warrants for services provided to the Company.
However, the Company has been advised that under the integration
provisions of Regulation D, the private placement offerings may be viewed by the
Securities and Exchange Commission as one continuous offering and, as such, may
not have been conducted in compliance with all applicable Regulation D limited
offering conditions. If the private placement offerings were not conducted in
compliance with the securities laws, the purchasers of the common and preferred
stock would have the right to have such securities repurchased by the Company
for an amount equal to the purchase price paid less any dividends received plus
interest, or if the common and preferred stock have been disposed of by the
holder at a loss, the difference between the purchase price and the price
received upon disposal less dividends received plus interest. In addition, the
Company has determined that certain issuances of common and preferred stock and
stock warrants issued for services are also subject to rescission for an amount
equal to the estimated value of services rendered to the Company. As a result,
the Company has elected to make a rescission offer to the holders of certain
issuances of common and preferred stock and stock warrants. The Company expects
the rescission offer to be effective by the fall of 1999, at which time the
offer will be outstanding for thirty days. Of the common stock and preferred
stock sold during 1998, 1997 and 1996, taking into consideration the conversion
of Series A and B preferred stocks, 5,300,304 and 2,050,093 shares of Class A
and B common stock for net proceeds of $7,988,989 and $5,119,475, respectively;
103,500 shares of Series A preferred stock for net proceeds of $207,000; and
87,349 and 77,349 shares of Series B preferred stock for net proceeds of
$262,047 and $232,047, respectively, are subject to the proposed rescission
offer as of December 31, 1998 and June 30, 1999, less dividends paid on Series A
and B preferred stock of $192,478 and $55,650, respectively, prior to the
conversion to common stock.
Regarding the common and preferred stock and stock warrants issued for
services in prior periods, as previously discussed; 214,187 shares of Class A
common stock valued at $149,887, taking into consideration the conversion of
Series A preferred stocks; 669,640 shares of Class B common stock valued at
$299,099 taking into consideration conversion of Series B preferred stock; and
799,000 Class A common stock warrants valued at $201,640, are subject to the
proposed rescission offer.
Accordingly, the Company is precluded from classifying these securities
and proceeds as capital until such time as the proposed rescission offer has
been completed. At which time the Company may classify as capital such
securities and proceeds to the extent the security holders elect to retain their
ownership in the Company. For security holders electing to rescind their
ownership, the rescission price will be paid in cash.
COMMON STOCK OPTIONS AND WARRANTS
In July 1998, the Company issued warrants to purchase 4,800,000 shares
of Class A common stock at $1.00 per share for a term of five years, see Note 6.
The warrants vest immediately and had no value on issuance under the minimum
value method.
In April 1998, the Company issued warrants to purchase 2,000,000 shares
of Class A common stock at $1.00 per share for a term of five years in
connection with an employment agreement with the Company's former president. The
warrants vest immediately and had no value on issuance under the minimum value
method. Subsequent to receiving these warrants, the Company's former president
assigned the warrants to various stockholders, including 1,710,000 warrants to
the new Chairman of the Board and Chief Executive Officer of the Company.
F-19
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
In May 1998, the Company issued warrants to purchase 350,954 shares of
Class B common stock at $1.00 per share for a term of five years for services
rendered. The warrants vest immediately and had no value on issuance under the
minimum value method.
During the year ended December 31, 1997, the Company issued warrants to
purchase 2,200,000 of Class B common stock for services rendered in connection
with raising of capital for the formation of the LLCs and certain private
placements. See Note 6 for discussions regarding these related party
transactions.
In May 1997, the Company issued 450,000 Class A common stock warrants
to a stockholder for consulting services rendered. The warrants vest immediately
and are exercisable at $2.00 per share and expire May 2002. The Company
determined that these warrants had no fair value at the date of issuance.
In April 1997, the Company issued 61,000 Class A common stock warrants
to an individual for consulting services rendered. The warrants vest immediately
and are exercisable at $1.00 per share and expire April 2000. The Company
determined that these warrants had a value of $9,760 at the date of issuance and
are subject to the proposed rescission offer.
During the year ended December 31, 1997, the Company's Board of
Directors approved and the Company adopted the 1997 Incentive Stock Option Plan
(the Plan) which was amended and restated effective July 1999. The Plan provides
for the granting of Class A common stock options to key employees of the
Company. Within certain limitations provided by the Plan, such options may
include provisions regarding vesting, exercise price, the amount of each grant
and other terms as shall be approved by the Board of Directors or by a committee
designated by the Board of Directors. Options granted under the Plan may be
either options that qualify as "incentive stock options", within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, or those that do
not qualify as such "incentive stock options" ("non-qualified options"). The
Plan, which permits up to 2,000,000 shares of the Company's Class A Common Stock
to be issued, terminates on October 19, 2007. No options were granted in 1997.
A summary of the Company's stock option plan for the year ended
December 31, 1998 and six months ended June 30, 1999 is presented below:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
---------------------------- ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Options outstanding at
beginning of period................... - $ - 1,465,563 $ .39
Options granted......................... 1,475,000 .39 480,000 .94
Options exercised....................... - - - -
Options cancelled....................... (9,437) .39 (30,250) .39
------------- ------------ ---------- -------------
Options outstanding at
end of period......................... 1,465,563 $ .39 1,915,313 $ .55
============= ============ ========== =============
Maximum shares exercisable.............. 738,438 $ .39 775,313 $ .39
============= ============ ========== =============
</TABLE>
SFAS 123 requires the Company to provide pro forma information
regarding net loss applicable to common stockholders and loss per share as if
compensation cost for the Company's stock options granted had been determined in
accordance with the fair value based method prescribed in that Statement. The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998: dividend yield of 0%; expected volatility
of 60% and a risk-free interest rate of 5% and expected lives of 5 years.
F-20
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 1999
and for the six months ended
June 30, 1999 and 1998 is unaudited)
Under the accounting provisions of SFAS No. 123, the Company's net loss
applicable to common stockholders and loss per share would have been revised to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the
For the Year Ended Six Months Ended
December 31, June 30,
--------------------------- ----------------------------
1998 1997 1999 1998
----------- ----------- ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss applicable to common
stockholders:
As reported...................... $ 4,396,883 $ 8,502,067 $ 1,353,645 $1,862,439
=========== =========== =========== ==========
Pro forma........................ $ 4,557,531 $ 8,502,067 $ 1,381,068 $1,943,033
=========== =========== =========== ==========
Net loss per common share:
Basic and assuming dilution
As reported...................... $ .19 $ .60 $ .05 $ .08
=========== =========== =========== ==========
Pro forma........................ $ .20 $ .60 $ .06 $ .09
=========== =========== =========== ==========
</TABLE>
NOTE 9 - INCOME TAXES
Deferred taxes are determined based on the temporary differences
between the financial statement and income tax bases of assets and liabilities
as measured by the enacted tax rates which will be in effect when these
differences reverse.
The components of deferred income tax assets (liabilities) at December
31, 1998, were as follows:
<TABLE>
<CAPTION>
Amount
---------
<S> <C>
Net operating loss carryforward.................................... $ 4,438,000
Loss on write-off of investments.................................... 409,000
Property and equipment............................................. (53,000)
Other .............................................................. 99,000
-------------
Gross deferred tax assets........................................... 4,893,000
Valuation allowance................................................. (4,893,000)
-------------
Net deferred tax assets............................................. $ -
=============
</TABLE>
At December 31, 1998, the Company provided a 100% valuation allowance
for the deferred tax asset because it could not determine whether it was more
likely than not that the deferred tax asset would be realized.
For the years ended December 31, 1998 and 1997, the income tax benefit
determined by applying the statutory income tax rate to pre-tax loss from
operations differs from the actual benefit as follows:
<TABLE>
<CAPTION>
1998 1997
---------- -------------
<S> <C> <C>
Provision for income tax benefit at statutory rate.................. $ (1,481,000) $ (2,639,000)
Deferred tax asset valuation allowance.............................. 1,476,000 2,642,000
Other............................................................... 5,000 (3,000)
------------- -------------
$ - $ -
============= =============
</TABLE>
F-21
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
At December 31, 1998, the Company had a net operating loss
carryforwards for federal income tax purposes totaling approximately $13,053,000
which, if not utilized, will expire as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------- -------------
<S> <C>
2010 .................................................... $ 61,000
2011 .................................................... 888,000
2012 .................................................... 7,400,000
2018 .................................................... 4,704,000
-------------
$ 13,053,000
=============
</TABLE>
In April 1998, the Company had a change in ownership which has resulted
in the Company's net operating loss carryforwards being subject to certain
utilization limitations in the future.
NOTE 10 - COMMITMENTS
The Company is obligated under a long-term non-cancelable operating
lease for office space expiring through the year 2000, at a minimum annual rent
as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------- -------------
<S> <C>
1999 .................................................... $ 185,578
2000 .................................................... 46,394
-------------
$ 231,972
=============
</TABLE>
Rent expense for the years ended December 31, 1998 and 1997 totaled
$188,264 and $255,156, respectively.
On February 1, 1998, the Company entered into an employment agreement
with the Chairman of the Board and Chief Executive Officer of the Company. The
five year agreement provides for an annual salary of $180,000, plus incentives
and certain employee benefits, as defined by the agreement. The agreement also
provides for a $30,000 signing bonus and an option under the Company's 1997
Incentive Stock Option Plan to purchase 100,000 shares of Class A common stock
at a price of $.39 per share which vests immediately and are exercisable over a
five year period.
On March 1, 1998, the Company entered into an employment agreement with
the Vice President of Operations of the Company. The four year agreement
provides for an annual salary of $150,000, plus incentives and certain employee
benefits, as defined by the agreement. The agreement also provides for a $30,000
signing bonus, which was accrued for as of December 31, 1998 and subsequently
paid, and an option under the Company's 1997 Incentive Stock Option Plan to
purchase 75,000 shares of Class A common stock at a price of $.39 per share
which vests 25% annually and are exercisable over a five year period.
On July 22, 1998, the Company entered into an employment agreement with
the Executive Vice President of the Company. The four year agreement provides
for an annual salary of $150,000, plus incentives and certain employee benefits,
as defined by the agreement. The agreement also provides for a $30,000 signing
bonus, which was accrued for as of December 31, 1998 and subsequently paid, and
an option under the Company's 1997 Incentive Stock Option Plan to purchase
150,000 shares of Class A common stock at a price of $.39 per share which vests
immediately and are exercisable over a five year period.
F-22
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
On July 22, 1998, the Company entered into an employment agreement with
the Vice President, General Counsel and Secretary of the Company. The three year
agreement provides for an annual salary of $108,000, plus incentives and certain
employee benefits, as defined by the agreement. The agreement also provides for
a $30,000 signing bonus, which was accrued for as of December 31, 1998 and
remains unpaid, and an option under the Company's 1997 Incentive Stock Option
Plan to purchase 100,000 shares of Class A common stock at a price of $.39 per
share which vests immediately and are exercisable over a five year period.
In March 1997, the former President of the Company, who was also a
stockholder, entered into an employment agreement. The agreement provided for a
three year employment term that automatically renewed annually with the first
year compensation set at $220,000, plus incentives and certain employee
benefits, as defined by the agreement. If the former President terminated his
employment for good reason or the Company terminated the President other than
for cause or disability, the former President was entitled to receive three
times his annual salary and bonus, as defined by the agreement, vesting of any
options and any such amounts credited to a qualified plan, continuation of
certain benefits for a year and any other amount due the former President. The
agreement also provided for a $50,000 signing bonus.
On April 13, 1998, the former President of the Company terminated his
original employment agreement discussed above, resigned as president and sold
his stock ownership interest in the Company to an entity which is partially
owned by certain existing stockholders of the Company. In accordance with the
agreement the former president entered into a new five-year employment agreement
which provides for an annual salary of $150,000, a 2,000,000 Class A common
stock warrant that vests immediately and is exercisable over a five year period
at $1 per share and participation in certain of the Company's employee benefit
plans. Subsequent to receiving this warrant the Company's former president
assigned the warrant to various stockholders, including 1,710,000 warrants to
the new Chairman of the board and Chief Executive Officer of the Company. The
agreement provides that the individual will devote approximately one-half of his
business time and attention to the business of the Company.
On August 31, 1998, the former president of the Company terminated his
employment agreement dated April 13, 1998, discussed above, and entered into a
settlement agreement and mutual release with the Company. In accordance with the
agreement the individual terminated his employment and waived his right to
receive any compensation in accordance with this current employment agreement.
In return, the Company agreed to forgive a receivable from the individual of
$121,043.
On August 26, 1998, the Company entered into an employment agreement
with the Chief Financial Officer. The three year agreement provides for an
annual salary of $125,000, plus incentives and certain employee benefits, as
defined by the agreement. The agreement also provides for a $30,000 signing
bonus, which was accrued for as of December 31, 1998 and subsequently paid, and
an option under the Company's 1997 Incentive Stock Option Plan to purchase
100,000 shares of Class A common stock at a price of $.39 per share which vests
33% annually and are exercisable over a five year period.
NOTE 11 - EMPLOYEE BENEFIT PLAN
The Company has a savings and profit sharing plan which allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. Participants may elect to defer up to 15%
of their compensation annually based on certain limits established by the
Internal Revenue Code. The Company may elect a discretionary matching
contribution annually. Participants' salary deferral contributions are fully
vested when made and Company discretionary match contributions vest over a five
year period. The Company made no discretionary matching contributions for the
years ended December 31, 1998 and 1997.
F-23
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended December 31, 1998, the Company had the following
non-cash transactions:
(a) The Company accrued dividends payable totaling $40,243.
(b) The Company issued 154,000 shares of Class B common stock valued
at $60,000 for services.
During the year ended December 31, 1997, the Company had the following
non-cash transactions:
(a) The Company accrued dividends payable totaling $491,075.
(b) The Company issued 100,000 shares of Class B common stock valued
at $100,000 to a consultant for services rendered.
(c) The Company issued 3,500 shares of Series A preferred stock valued
at $7,000 to consultants for services rendered.
(d) The Company issued 800,000 shares of Class B common stock valued
at $800,000 on conversion of a $100,000 note payable and for
commitment fees.
(e) The Company issued a warrant to 1,050,000 Class B common stock and
500,000 shares of Class A common stock with a combined estimated
fair market value of $678,500, to a stockholder for services
rendered in association with certain private placements of the
Company's Series A and B convertible preferred stock. A company
owned by the stockholder was given 200,000 shares of Class A
common stock valued at $78,000 as consideration for the
termination of a distribution agreement.
(f) A stockholder received 110,000 shares of Class A common stock
valued at $42,900 for services in connection with the sale of the
Company's services.
(g) The Company issued 13,033 shares of Series B preferred stock
valued at $39,099 for services.
(h) The Company granted rights to 154,000 shares of Class B common
stock valued at $60,000 for services.
(i) The Company issued 1,267 shares of Class A common stock (treasury
stock) with an estimated fair market value of $1,267 for art work.
(j) The Company issued 1,150,000 Class B common stock warrants with an
estimated fair market value of $184,000 for stock rights that had
been accrued for at December 31, 1996.
(k) The Company issued 2,328,940 shares of Class A common stock valued
at $885,936 for the purchase of the minority interest in the LLCs.
(l) The Company reclassified 98,720 shares of Class A common stock and
738,000 of Class A common stock warrants with a combined estimated
value of $290,600 as subject to the proposed rescission offer.
During the six months ended June 30, 1999, the Company had the
following non-cash transactions:
(a) The Company accrued dividends payable totaling $25,602.
(b) The Company reclassified $30,000 of the rescission liability to
outstanding Series B preferred stock for the 10,000 shares
acquired by CyNet Holdings, LLC which are no longer subject to the
rescission offer (see Note 6).
F-24
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
During the six months ended June 30, 1998, the Company had the
following non-cash transactions:
(a) The Company accrued dividends payable totaling $27,367.
(b) The Company issued an additional 92,640 shares of Class A common
stock for the purchase of the minority interests in the LLCs.
(c) The Company issued 154,000 shares of Class A common stock to a
consultant for services rendered at an estimated fair market value
of $.39 per share; which was accrued for at December 31, 1997.
NOTE 13 - PRIOR PERIOD ADJUSTMENT
The Company's financial statements for the year ended December 31,
1997, have been restated to reflect the write-down of assets no longer used in
the operations of the business and to reflect the reclassification of research
and development costs that was recorded as computer equipment. In the third
quarter of 1998, the Company under its new management, reviewed its operations
and equipment and determined certain computer equipment was not being used in
the operations of the business prior to December 31, 1997 and had no salvage
value. Accordingly, the Company restated its financial statements to reflect the
write off of $496,133 of computer and telephone equipment during the year ended
December 31, 1997. The Company also determined certain costs were incorrectly
capitalized in 1997 that were for research and development. Accordingly, the
Company restated its financial statements to reflect the correction of the
$241,300 as research and development costs in 1997.
The effect of the restatement is as follows:
<TABLE>
<CAPTION>
As Previously As
For the year ended December 31, 1997 Reported Restated
-------------- -----------
<S> <C> <C>
Consolidated Balance Sheet:
Property and equipment, less accumulated
depreciation and amortization............... $ 3,564,947 $ 2,901,257
Deficit....................................... (12,018,936) (12,682,625)
Consolidated Statement of Loss:
Selling, general and administrative expenses.. $ 7,276,635 $ 7,517,935
Depreciation and amortization................. 488,396 414,652
Impairment loss on long-lived assets.......... - 496,133
Loss from operations.......................... (7,295,181) (7,958,870)
Net loss applicable to common stockholders.... (7,838,378) (8,502,067)
Net loss per common share -
basic and assuming dilution................... $ (.56) $ (.60)
</TABLE>
NOTE 14 - WRITE-DOWN OF LONG-LIVED ASSETS
During 1998, the Company acquired certain telecommunications equipment
that is more efficient and has a higher fax transmission capacity than certain
of its existing equipment. The Company determined that its nodes, which is
primarily computer equipment that is located in various cities throughout the
United States, were cost prohibitive. The computer equipment from the nodes was
implemented in the Company's operations to the extent possible. Accordingly, the
Company recorded a write-down of $163,079 for the year ended December 31, 1998
for property and equipment that is currently not being utilized.
F-25
<PAGE>
CYNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED)
In addition, during 1998 the Company wrote-down certain art work and
artifacts to their estimated market value based on an independent appraisal and
recorded an impairment loss of $108,878.
NOTE 15 - SUBSEQUENT EVENTS
Subsequent to June 30, 1999 through August 31, 1999, CyNet Holdings,
LLC provided additional funding of $380,000 through the purchase of 380,000
shares of the Company's Class A common stock at $1.00 per share in accordance
with its stock subscription agreement with the Company. As of August 31, 1999,
the Company has a remaining commitment for funding of up to $5,894,000 from
CyNet Holdings, LLC for additional working capital needs through December 31,
1999.
In July 1999, the Company entered into a purchase agreement with CyNet
Holding, LLC. Pursuant to the agreement CyNet Holdings, LLC transferred all of
the outstanding membership interest of CyNet Interactive, LLC to the Company,
resulting in CyNet Interactive, LLC becoming a wholly-owned subsidiary of the
Company. In consideration for this transfer, the Company forgave a $118,936
account receivable due from CyNet Interactive, LLC. Prior to the transfer both
the Company and CyNet Interactive, LLC were considered under common control of
CyNet Holdings, LLC. Accordingly, the transfer will be accounted for at
historical cost in a manner similar to a pooling of interest.
As of August 31, 1999, the Company has entered into agreements with
stand-by investors to provide $5,000,000 funding for the proposed rescission
offer. The agreements provide that the stand-by investors will purchase up to
$5,000,000 of Class A common stock at $1.37 per share if existing stockholders
elected to accept the proposed rescission offer. In addition with the consent of
the stand-by investors, any unused proceeds from the stand-by investors
remaining after the funding of the rescission offer will be used by the Company
for general working capital purposes. At August 31, 1999, of the $5,000,000
commitments, approximately $602,000 has been placed in an escrow account with
the balance to be funded prior to the effective date of the rescission offer.
One of the agreements entered by the Company discussed above contains a
put option. In accordance with the agreement this stand-by investor, which has
committed to fund $2,200,000 of the rescission financing, can put their shares
back to the Company by the anniversary date of the expiration of the rescission
offer at a $1.51 per share. Accordingly, the $2,200,000 will be immediately
accreted up to $2,425,000 to reflect the put option and classified outside of
the equity section as mezzanine capital until such time the put option has
expired. In addition, in August 1999 the Company entered into an agreement with
a related entity of the stand-by investor to provide financial advisory services
to the Company. In accordance with the agreement the related entity will receive
a warrant to purchase 376,000 shares of the Company's Class A common stock. The
warrant has an exercise price of $2.00 per share, vests immediately and expires
three years from issuance.
In September, 1999, the Company agreed in principle with the warrant
holders to modify the terms of warrants issued in 1997 to purchase 2,200,000
shares of Class B common stock. The new terms of the warrants call for the
warrants to vest immediately, are exercisable at $1.00 per share and expire
November 4, 2001. Due to the modification of the terms of the warrants, the
Company will take a third quarter 1999 non-cash charge of approximately
$1,300,000 based on the fair value of the warrants at the date of modification.
In September, 1999, the Company agreed in principle with a stockholder
of the Company to issue a warrant to purchase 100,000 share of Class B common
stock for assistance with the private placement of preferred stock. The warrant
vests immediately, is exercisable at $1.00 per share and expires November 4,
2001. Due to the settlement of the claim with the stockholder, the Company will
take a third quarter 1999 non-cash charge of approximately $61,000 based on the
fair value of the warrant.
Subsequent to June 30, 1999 through September 13, 1999, CyNet Holdings,
LLC provided additional short-term financing to the Company of $277,000. The
unsecured borrowings are non-interest bearing and are due on demand.
F-26
<PAGE>
EXHIBIT A
RESCISSION ELECTION FORM
CYNET, INC.
ELECTION FOR RESCISSION
OR
AFFIRMATION OF SUBSCRIPTION AND RELEASE
===============================================================================
THE RESCISSION OFFER WILL EXPIRE AT THE LATER OF (A) 12:00 MIDNIGHT,
HOUSTON TIME, ON ______________, 1999, OR (B) THIRTY DAYS AFTER THE DATE
ON WHICH THE UNDERSIGNED ACTUALLY RECEIVED THIS ELECTION FORM.
===============================================================================
Please complete and sign this document and return it to CyNet, Inc. at the
address set forth below, on or before midnight, Houston time, on
_______________, 1999, the Expiration Date of the Rescission Offer. Please
indicate your election by INITIALING either (i) the space immediately preceding
paragraph A below to ACCEPT the Rescission Offer or (ii) the space immediately
preceding paragraph B to REJECT the Rescission Offer and affirm your
subscription.
CyNet, Inc.
12777 Jones Road, Suite 400
Houston, Texas 77070
Gentlemen:
The undersigned hereby acknowledges having received and carefully read the
rescission offer (the "Rescission Offer") described in the prospectus dated
_______________, 1999 (the "Prospectus"), by CyNet, Inc. (the "Company") to
repurchase the Subject Securities hereinafter identified which were previously
acquired by the undersigned from the Company (the "Securities"). Capitalized
terms not otherwise defined herein shall have the meanings given to them in the
Prospectus.
As indicated below, the undersigned hereby (i) elects to accept the
Rescission Offer and requests that the Company repurchase the Securities in
accordance with the terms of the Rescission Offer, or (ii) affirms the
undersigned's subscription for all of such Securities.
PLEASE SELECT "A" OR "B" BELOW BY CHECKING THE APPROPRIATE BOX BELOW
_____ A. ACCEPTANCE OF RESCISSION OFFER; REQUEST FOR RESCISSION
1. The undersigned hereby irrevocably elects to accept the Company's
offer to repurchase all of the Securities and to pay the undersigned an amount
equal to the consideration which the undersigned paid to the Company for the
Securities together with interest from the date of purchase to the date of
repayment at the rate specified by the undersigned's place of residence and/or
domicile, as the case may be, less, with respect to shares of Preferred Stock,
dividends paid.
2. The undersigned hereby encloses the certificates identified below,
representing all of the Securities that the undersigned acquired from the
Company, duly endorsed for transfer or accompanied by an assignment separate
from the applicable stock certificate in either case with the signature(s)
guaranteed by an eligible guarantor institution. The enclosed represents all,
and not less than all, of the Securities that the undersigned acquired from the
Company. The undersigned hereby represents that the undersigned is conveying
all interests in the Securities free and clear of all
A-1
<PAGE>
liens and encumbrances of any kind, and that no such interest has been
previously or concurrently transferred in any manner to any other person or
entity.
<TABLE>
<CAPTION>
Number Rescission
Class of Certificate of Consideration Interest Dividends Offer
Security Number Shares Paid Due Received Amount
-------- ----------- ------ ------------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
_____ B. REJECTION OF RESCISSION OFFER; AFFIRMATION OF SUBSCRIPTION
The undersigned hereby affirms the undersigned's subscription or
subscriptions to purchase all Securities of the Company, and elects NOT to
accept the Company's offer to repurchase such Securities.
RELEASE
In consideration of the offer to repurchase the undersigned's
Securities, the receipt and sufficiency of which is hereby acknowledged, the
undersigned hereby irrevocably releases, remises and discharges the Company
and its past, current and future officers, directors, employees, affiliates,
representatives and agents, of and from all claims which the undersigned and
the undersigned's successors and assigns have, ever had or might have in
connection with the sales and issuances by the Company of its Securities
including, but not limited to, any violation of federal and/or state security
laws or regulations, to the maximum extent permitted by applicable law.
SPACE INTENTIONALLY LEFT BLANK
A-2
<PAGE>
THE UNDERSIGNED:
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------------------
Print name of the undersigned and, (a) if
Securities are held by a partnership, corporation,
trust or entity, the name and capacity of the
individual signing on its behalf, and (b) if
Securities are held as joint tenants or as
community property, name(s) of co-purchaser(s).
Dated: ________________, 1999 --------------------------------------------------
Signature
--------------------------------------------------
Tax I.D./Soc. Sec. No.
Dated: ________________, 1999 --------------------------------------------------
Signature
--------------------------------------------------
Tax I.D./Soc. Sec. No.
Residence Address:
Street Address: --------------------------------------------------
City, State and Zip Code --------------------------------------------------
--------------------------------------------------
Mailing Address (if different
from residence):
Street Address: --------------------------------------------------
City State and Zip Code: --------------------------------------------------
</TABLE>
A-3
<PAGE>
EXHIBIT B
INDEX TO EXCERPTS FROM STATE SECURITIES LAWS
<TABLE>
<S> <C>
ARIZONA..........................................................................................................B-2
ARKANSAS.........................................................................................................B-2
CALIFORNIA.......................................................................................................B-3
COLORADO.........................................................................................................B-6
CONNECTICUT......................................................................................................B-8
DISTRICT OF COLUMBIA.............................................................................................B-9
FLORIDA..........................................................................................................B-9
GEORGIA.........................................................................................................B-10
HAWAII..........................................................................................................B-12
IDAHO...........................................................................................................B-12
ILLINOIS........................................................................................................B-13
INDIANA.........................................................................................................B-15
IOWA............................................................................................................B-16
KANSAS..........................................................................................................B-18
KENTUCKY........................................................................................................B-19
LOUISIANA.......................................................................................................B-20
MAINE...........................................................................................................B-21
MARYLAND........................................................................................................B-23
MASSACHUSETTS...................................................................................................B-25
MICHIGAN........................................................................................................B-26
MINNESOTA.......................................................................................................B-27
MISSISSIPPI.....................................................................................................B-28
MISSOURI........................................................................................................B-29
NEVADA..........................................................................................................B-30
NEW HAMPSHIRE...................................................................................................B-31
NEW JERSEY......................................................................................................B-32
NEW YORK........................................................................................................B-34
NORTH CAROLINA..................................................................................................B-34
OHIO............................................................................................................B-35
OKLAHOMA........................................................................................................B-36
OREGON..........................................................................................................B-37
PENNSYLVANIA....................................................................................................B-39
SOUTH CAROLINA..................................................................................................B-40
TENNESSEE.......................................................................................................B-40
TEXAS...........................................................................................................B-42
UTAH............................................................................................................B-46
VERMONT.........................................................................................................B-47
VIRGINIA........................................................................................................B-48
WASHINGTON......................................................................................................B-49
WISCONSIN.......................................................................................................B-51
</TABLE>
B-1
<PAGE>
ARIZONA SECURITIES ACT
SECTION 44-1841. SALE OF UNREGISTERED SECURITIES PROHIBITED;
CLASSIFICATION.
A. It is unlawful to sell or offer for sale within or from this state
any securities unless such securities have been registered by description under
sections 44-1871 through 44-1875 or registered by qualification under sections
44-1891 through 44-1902 or are securities for which a notice filing has been
made under section 44-3321, except securities exempt under section 44-1843 or
44-1843.01 or securities sold in exempt transactions under section 44-1844.
B. A person violating this section is guilty of a class 4 felony.
SECTION 44-2001. VOIDABLE SALE OR CONTRACT FOR SALE OF SECURITIES;
REMEDY.
A. A sale or contract for sale of any securities to any purchaser in
violation of any provision of section 44-1841 or 44-1842 or article 13 of this
chapter is voidable at the election of the purchaser, who may bring an action in
a court of competent jurisdiction to recover the consideration paid for the
securities, with interest thereon, taxable court costs and reasonable attorneys'
fees, less the amount of any income received by dividend or otherwise from
ownership of the securities, upon tender of the securities purchased or the
contract made, or for damages if he no longer owns the securities.
B. A person against whom an action for a violation of section 44-1991
is brought is not liable under subsection A of this section if the person
sustains the burden of proof that the person did not know and in the exercise of
reasonable care could not have known of the untrue statement or misleading
omission.
SECTION 44-2004. LIMITATION OF CIVIL ACTIONS.
A. No civil action shall be maintained under this article to enforce
any liability based on a violation of section 44-1841 or 44-1842 unless brought
within one year after the violation occurs.
B. Except as provided in subsection C of this section, no civil action
shall be brought under this article to enforce any liability based on a
violation of article 13 unless brought within two years after discovery of the
fraudulent practice on which the liability is based, or after the discovery
should have been made by the exercise of reasonable diligence.
C. No civil action shall be brought under this article to enforce any
liability based on a violation of section 44-1997 or 44-1998 unless brought
within one year after the discovery of the untrue statement or the omission or
after the discovery should have been made by the exercise of reasonable
diligence. No action shall be brought to enforce a liability created under
section 44-1997 more than three years after the security was bona fidely offered
to the public or under section 44-1998 more than three years after the sale.
SECTION 44-2005. REMEDY NOT EXCLUSIVE.
Nothing in this article shall limit any statutory or common law right
of any person in any court for any act involved in the sale of securities.
ARKANSAS SECURITIES ACT
SECTION 23-42-106. CIVIL LIABILITY.
(a)(1) Any person who commits the following acts is liable to the
person buying the security from him, who may sue either at law or in equity to
recover the consideration paid for the security, together with interest at six
percent (6%) per year from the date of payment, costs, and reasonable attorney's
fees, less the amount of any income received on the security, upon the tender
of the security, or for damages if he no longer owns the security:
(A) Offers or sells a security in violation of Section 23-42-301,
23-42-212(b), 23-42-501(1) or (2), or of any rule or order under
Section 23-42-502 which requires the affirmative approval of sales
literature before it is used, or in violation of any condition imposed
under Section 23-42-403(d), 23-42-404(g), or 23-42-404(i); or
(B) Offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of circumstances under which they are
made, not misleading, the buyer not knowing of the untruth or omission, and who
does not sustain the burden of proof that he did not know, and in the exercise
of reasonable care could not have known, of the untruth or omission;
(2) Damages are the amount that would be recoverable upon a tender less
the value of the security when the buyer disposed of it and interest at six
percent (6%) per year from the date of disposition.
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(b)(1) Any person who purchases a security in violation of
Section 23-42-301, 23-42-307, 23-42-507, and 23-42-508, or otherwise by means
of any untrue statement of a material fact or any omission to state a
material fact necessary in order to make the statements made, in light of the
circumstances under which they are made, not misleading, the seller not
knowing of the untruth or omission, and who shall not sustain the burden of
proof that he did not know, and in the exercise of reasonable care could not
have known, of the untruth or omission, shall be liable to the person selling
the security to him, who may sue either at law or in equity to recover either
the security or the security plus any income or other distributions in cash
or other property received directly or indirectly by the purchaser, upon
tender of the consideration the seller received or for damages together with
interest at six percent (6%) from the date of purchase plus costs and
reasonable attorneys' fees.
(2) Damages may be for out-of-pocket losses or for the benefit of the
bargain.
(3) Notice of willingness to pay the amount specified in exchange for
the security shall constitute valid tender pending acceptance thereof by the
purchaser.
(c) Every person who controls a seller liable under subsection (a) of
this section or a purchaser liable under subsection (b) of this section; every
partner, officer, or director of such a seller or purchaser; every person
occupying a similar status or performing a similar function; every employee of
such a seller or purchaser who materially aids in the sale; and every
broker-dealer or agent who materially aids in the sale or also liable jointly
and severally with, and to the same extent as, the seller or purchaser, unless
the nonseller or nonpurchaser who is so liable sustains the burden of proof that
he did not know, and in the exercise of reasonable care could not have known, of
the existence of the facts by reason of which the liability is alleged to exist.
There is contribution as in cases of contract among the several persons so
liable.
(d) Any tender specified in this section may be made at any time before
entry of judgment.
(e) Every cause of action under this section survives the death of any
person who might have been a plaintiff or defendant.
(f) No person may sue under this section after five (5) years from the
effective date of the contract of sale. No person may sue under this section:
(1) If the buyer received a written offer, before suit and at a time
when he owned the security, to refund the consideration paid together with
interest at six percent (6%) per year from the date of payment less the amount
of any income received on the security, and he failed to accept the offer within
thirty (30) days of its receipt; or
(2) If the buyer received such an offer before suit and at a time when
he did not own the security unless he rejected the offer in writing within
thirty (30) days of its receipt.
(g) No person who has made or engaged in the performance of any
contract in violation of any provision of this chapter or any rule or order
hereunder, or who has acquired any purported right under any such contract with
knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract.
SECTION 23-42-501. SALE OF UNREGISTERED NONEXEMPT SECURITIES.
It is unlawful for any person to offer or sell any security in this
state unless:
(1) It is registered under this chapter;
(2) The security or transaction is exempted under Section 23-42-503
or 23-42-504; or
(3) It is a covered security.
CALIFORNIA CORPORATE SECURITIES LAW OF 1968
SECTION 25110. It is unlawful for any person to offer or sell in this
state any security in an issuer transaction (other than in a transaction subject
to Section 25120), whether or not by or through underwriters, unless such sale
has been qualified under Section 25111, 25112 or 25113 (and no order under
Section 25140 or subdivision (a) of Section 25143 is in effect with respect to
such qualification) or unless such security or transaction is exempted under
Chapter 1 (commencing with Section 25100 of this part. The offer or sale of such
a security in a manner that varies or differs from, exceeds the scope of, or
fails to conform with either a material term or material condition of
qualification of the offering as set forth in the permit or qualification order,
or a material representation as to the manner of offering which is set forth in
the application for qualification, shall be an unqualified offer or sale.
SECTION 25500. Any person who willfully participates in any act or
transaction in violation of Section 25400 shall be liable to any other person
who purchases or sells any security at a price which was affected by such act or
transaction for the damages sustained by the latter as a result of such act or
transaction. Such damages shall be the
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difference between the price at which such other person purchased or sold
securities and the market value which such securities would have had at the time
of his purchase or sale in the absence of such act or transaction, plus interest
at the legal rate.
SECTION 25501. Any person who violates Section 25401 shall be liable to
the person who purchases a security from him or sells a security to him, who may
sue either for rescission or for damages (if the plaintiff or the defendant, as
the case may be, no longer owns the security), unless the defendant proves that
the plaintiff knew the facts concerning the untruth or omission or that the
defendant exercised reasonable care and did not know (or if he had exercised
reasonable care would not have known) of the untruth or omission. Upon
rescission, a purchaser may recover the consideration paid for the security,
plus interest at the legal rate, less the amount of any income received on the
security, upon tender of the security. Upon rescission, a seller may recover the
security, upon tender of the consideration paid for the security plus interest
at the legal rate, less the amount of any income received by the defendant on
the security. Damages recoverable under this section by a purchaser shall be an
amount equal to the difference between (a) the price at which the security was
bought plus interest at the legal rate from the date of purchase and (b) the
value of the security at the time it was disposed of by the plaintiff plus the
amount of any income received on the security by the plaintiff. Damages
recoverable under this section by a seller shall be an amount equal to the
difference between (1) the value of the security at the time of the filing of
the complaint plus the amount of any income received by the defendant on the
security and (2) the price at which the security was sold plus interest at the
legal rate from the date of sale. Any tender specified in this section may be
made at any time before entry of judgment.
SECTION 25502. Any person who violates Section 25402 shall be liable to
the person who purchases a security from him or sells a security to him, for
damages equal to the difference between the price at which such security was
purchased or sold and the market value which such security would have had at the
time of the purchase or sale if the information known to the defendant had been
publicly disseminated prior to that time and a reasonable time had elapsed for
the market to absorb the information, plus interest at the legal rate, unless
the defendant proves that the plaintiff knew the information or that the
plaintiff would have purchased or sold at the same price even if the information
had been revealed to him.
SECTION 25503. Any person who violates Section 25110, 25130 or 25133,
or a condition of qualification under Chapter 2 (commencing with Section 25110)
of this part, imposed pursuant to Section 25141, or an order suspending trading
issued pursuant to Section 25219, shall be liable to any person acquiring from
him the security sold in violation of such section, who may sue to recover the
consideration he paid for such security with interest thereon at the legal rate,
less the amount of any income received therefrom, upon the tender of such
security, or for damages, if he no longer owns the security, or if the
consideration given for the security is not capable of being returned. Damages,
if the plaintiff no longer owns the security, shall be equal to the difference
between (a) his purchase price plus interest at the legal rate from the date of
purchase and (b) the value of the security at the time it was disposed of by the
plaintiff plus the amount of any income received therefrom by the plaintiff.
Damages, if the consideration given for the security is not capable of
being returned, shall be equal to the value of that consideration plus interest
at the legal rate from the date of purchase, provided the security is tendered;
and if the plaintiff no longer owns the security, damages in such case shall be
equal to the difference between (a) the value of the consideration given for the
security plus interest at the legal rate from the date of purchase and (b) the
value of the security at the time it was disposed of by the plaintiff plus the
amount of any income received therefrom by the plaintiff. Any person who
violates Section 25120 or a condition of qualification under Chapter 3
(commencing with Section 25120) of this part imposed pursuant to Section 25141,
shall be liable to any person acquiring from him the security sold in violation
of such section who may sue to recover the difference between (a) the value of
the consideration received by the seller and (b) the value of the security at
the time it was received by the buyer, with interest thereon at the legal rate
from the date of purchase. Any person on whose behalf an offering is made and
any underwriter of the offering, whether on a best efforts or a firm commitment
basis, shall be jointly and severally liable under this section, but in no event
shall any underwriter (unless such underwriter shall have knowingly received
from the issuer for acting as an underwriter some benefit, directly or
indirectly, in which all other underwriters similarly situated did not share in
proportion to their respective interest in the underwriting) be liable in any
suit or suits authorized under this section for damages in excess of the total
price at which the securities underwritten by him and distributed to the public
were offered to the public. Any tender specified in this section may be made at
any time before entry of judgment. No person shall be liable under this section
for violation of Section 25110, 25120 or 25130 if the sale of the security is
qualified prior to the payment or receipt of any part of the consideration for
the security sold, even though an offer to sell or a contract of sale may have
been made or entered into without qualification.
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SECTION 25504. Every person who directly or indirectly controls a
person liable under Section 25501, or 25503, every partner in a firm so liable,
every principal executive officer or director of a corporation so liable, every
person occupying a similar status or performing similar functions, every
employee of a person so liable who materially aids in the act or transaction
constituting the violation, and every broker-dealer or agent who materially aids
in the act or transaction constituting the violation, are also liable jointly
and severally with and to the same extent as such person, unless the other
person who is so liable had no knowledge of or reasonable grounds to believe in
the existence of the facts by reason of which the liability is alleged to exist.
SECTION 25507. (a) No action shall be maintained to enforce any
liability created under Section 25503 (or Section 25504 or Section 25504.1
insofar as they relate to that section) unless brought before the expiration of
two years after the violation upon which it is based or the expiration of one
year after the discovery by the plaintiff of the facts constituting such
violation, whichever shall first expire.
(b) No buyer may commence an action under Section 25503 if, before suit
is commenced, such buyer shall have received a written offer approved as to form
by the commissioner (1) stating the respect in which liability under such
section may have arisen, (2) offering to repurchase the security for a cash
price payable upon delivery of the security or offering to pay the buyer an
amount in cash equal in either case to the amount recoverable by the buyer in
accordance with Section 25503, or, offering to rescind the transaction by
putting the parties back in the same position as before the transaction, (3)
providing that such offer may be accepted by the buyer at any time within a
specified period of not less than 30 days after the date of receipt thereof
unless rejected earlier during such period by the buyer, (4) setting forth the
provisions of this subdivision (b), and (5) containing such other information as
the commissioner may require by rule or order, and such buyer shall have failed
to accept such offer in writing within the specified period after receipt
thereof.
(c) The commissioner may by rule or order impose as a condition to
approval of an offer under subdivision (b) of this section, if the commissioner
finds such action is necessary and appropriate for the protection of investors,
conditions requiring:
(1) That equivalent and concurrent offers be made to all investors as
to whom liability may have arisen and still exists under Section 25503 (or
Section 25504 or Section 25504.1 insofar as they relate to that section) in
connection with the distribution or transaction;
(2) That the offer be made subject to a condition voiding such offer if
the issuer, by reason of acceptances, is disabled from commencing or continuing
business;
(3) That the offer be made within a specific period after approval
thereof by the commissioner;
(4) If the consideration paid by the offeree was other than monetary or
if the offer is of rescission, and if the offer is rejected by the offeree on
the ground that it does not accord him the damages payable under Section 25503
or that the rescission offered does not place the parties back in the same
position as before the transaction, that an offer so rejected shall not bar the
commencement of an action by the offeree under Section 25503 (or Section 25504
or Section 25504.1 insofar as they relate to that section); or
(5) That the offeror file a report or reports with the commissioner
containing such information as he may require concerning the making of the
offer, its acceptance or rejection, and compliance with its terms and conditions
or with conditions imposed under this subdivision.
(d) Each person who files a repurchase offer with the commissioner
pursuant to subdivision (b) shall file with the commissioner, in such form as
the commissioner by rule prescribes, an irrevocable consent appointing the
commissioner or the commissioner's successor in office to be such person's
attorney to receive service of any lawful process in any noncriminal suit,
action or proceeding against such person or such person's successor, executor or
administrator, which arises under this law or any rule or order hereunder after
the consent has been filed, with the same force and validity as if served
personally on the person filing the consent. A person who has filed such a
consent in connection with a qualification under this law (or application for a
permit under any prior law if the application under this law states that such
consent is still effective) need not file another. Service may be made by
leaving a copy of the process in the office of the commissioner but it is not
effective unless (1) the plaintiff, who may be the commissioner in a suit,
action or proceeding instituted by him, forthwith sends notice of the service
and a copy of the process by registered or certified mail to the defendant or
respondent at such person's last address on file with the commissioner, and (2)
the plaintiff's affidavit of compliance with this section is filed in the case
on or before the return day of the process, if any, or within such further time
as the court allows.
SECTION 25534. Whenever any securities are issued which the
commissioner determines were offered or sold in violation of Section 25110,
25120, or 25130, the commissioner may, by written order to the issuer and notice
to the holders of such securities, require certificates evidencing such
securities to have stamped or printed prominently on their face a legend, in the
form prescribed by rule of the commissioner, restricting the transfer of such
securities. Upon receipt of the order, the issuer shall stamp or print such
legend prominently on the face of all outstanding certificates subject to
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the order. If, after such order or notice has been given, a request for a
hearing is filed in writing by the person or persons to whom such order or
notice was addressed, a hearing shall be held in accordance with the provisions
of the Administrative Procedure Act, Chapter 5 (commencing with Section 11500)
of Part 1 of Division 3 of Title 2 of the Government Code, and the commissioner
shall have all the powers granted thereunder; unless such hearing is commenced
within 15 business days after the request for hearing is received by the
commissioner (or the person or persons affected and the issuer consent to a
later date), such order and notice are rescinded.
COLORADO SECURITIES ACT
SECTION 11-51-301. REQUIREMENT FOR REGISTRATION OF SECURITIES.
It is unlawful for any person to offer to sell or sell any security in
this state unless it is registered under this article or unless the security or
transaction is exempted under sections 11-51-307, 11-51-308, or 11-51-309.
SECTION 11-51-604. CIVIL LIABILITIES.
(1) Any person who sells a security in violation of section 11-51-301
is liable to the person buying the security from such seller for the
consideration paid for the security, together with interest at the statutory
rate from the date of payment, costs, and reasonable attorney fees, less the
amount of any income received on the security, upon the tender of the security,
or is liable for damages if the buyer no longer owns the security. Damages are
deemed to be the amount that would be recoverable upon a tender, less the value
of the security when the buyer disposed of it, and interest at the statutory
rate from the date of disposition. No person is liable under this subsection (1)
for a violation of section 11-51-301 due solely to a failure to file the
prescribed notification of exemption or to pay the required exemption fee for an
exemption under section 11-51-308(1)(p).
(2)(a) Except as provided in paragraph (b) of this subsection (2), any
broker-dealer or sales representative who sells a security in violation of
section 11-51-401 is liable to the person buying the security from such seller
for the consideration paid for the security, together with interest at the
statutory rate from the date of payment, costs, and reasonable attorney fees,
less the amount of any income received on the security, upon the tender of the
security, or is liable for damages if the buyer no longer owns the security.
Damages are deemed to be the amount that would be recoverable upon a tender,
less the value of the security when the buyer disposed of it, and interest at
the statutory rate from the date of disposition.
(b) No broker-dealer or sales representative is liable under this
subsection (2) for a sale of a security exempt from registration under section
11-51-307(1)(g) to (1)(j) or for a sale of a security in a transaction exempt
from registration under section 11-51-308 (1)(a), (1)(e) to (1)(l), (1)(o), or
(1)(p); but this paragraph (b) does not apply if at the time of such sale:
(I) In the case of a violation of section 11-51-401 arising from the
failure of a broker-dealer to be licensed under this article, such broker-dealer
was registered as a broker-dealer under the federal "Securities Exchange Act of
1934", licensed as a broker-dealer or its equivalent under the laws of another
state, or held a limited license under this article; or
(II) In the case of a violation of section 11-51-401 arising from the
failure of a sales representative to be licensed under this article, such sales
representative was licensed as a sales representative or its equivalent under
the laws of another state, held a limited license under this article, or in
connection with such sale was acting for a broker-dealer which was registered as
a broker-dealer under the federal "Securities Exchange Act of 1934", licensed as
a broker-dealer or its equivalent under the laws of another state, or licensed
under this article.
(3) Any person who recklessly, knowingly, or with an intent to defraud
sells or buys a security in violation of section 11-51-501 is liable to the
person buying or selling a security in connection with the violation for such
legal or equitable relief which the court deems appropriate, including
rescission, actual damages, interest at the statutory rate, costs, and
reasonable attorney fees.
(4) Any person who sells a security in violation of section
11-51-501(1)(b) (the buyer not knowing of the untruth or omission) and who does
not sustain the burden of proof that such person did not know, and in the
exercise of reasonable care could not have known, of the untruth or omission is
liable to the person buying the security from such person, who may sue to
recover the consideration paid for the security, together with interest at the
statutory rate from the date of payment, costs, and reasonable attorney fees,
less the amount of any income received on the security, upon the tender of the
security, or is liable for damages if the buyer no longer owns the security.
Damages are deemed to be the amount that would be recoverable upon a tender,
less the value of the security when the buyer disposed of it, and interest at
the statutory rate from the date of disposition.
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(5)(a) Every person who, directly or indirectly, controls a person
liable under subsection (1) or (2) of this section is liable jointly and
severally with and to the same extent as such controlled person, unless the
controlling person sustains the burden of proof that such person did not know,
and in the exercise of reasonable care could not have known, of the existence of
the facts by reason of which the liability is alleged to exist.
(b) Every person who, directly or indirectly, controls a person liable
under subsection (3) or (4) of this section is liable jointly and severally with
and to the same extent as such controlled person, unless such controlling person
sustains the burden of proof that such person acted in good faith and did not,
directly or indirectly, induce the act or acts constituting the violation or
cause of action.
(c) Any person who knows that another person liable under subsection
(3) or (4) of this section is engaged in conduct which constitutes a violation
of section 11-51-501 and who gives substantial assistance to such conduct is
jointly and severally liable to the same extent as such other person.
(6) Any tender specified in this section may be made at any time before
entry of judgment.
(7) Every cause of action under this article survives the death of any
individual who might have been a plaintiff or defendant.
(8) No person may sue under subsection (1) or (2) or paragraph (a) of
subsection (5) of this section more than two years after the contract of sale.
No person may sue under subsection (3) or (4) or paragraph (b) or (c) of
subsection (5) of this section more than three years after the discovery of the
facts giving rise to a cause of action under subsection (3) or (4) of this
section or after such discovery should have been made by the exercise of
reasonable diligence and in no event more than five years after the purchase or
sale.
(9)(a) No buyer may sue under this section:
(I) If the buyer received a written rescission offer, before suit and
at a time when the buyer owned the security, to refund the consideration paid
together with interest at the statutory rate from the date of payment, less the
amount of any income received on the security, and the buyer failed to accept
the offer within thirty days of its receipt; or
(II) If the buyer received such an offer before suit and at a time when
the buyer did not own the security, unless the buyer rejects the offer in
writing within thirty days of its receipt.
(b) If, after acceptance, a rescission offer is not performed in
accordance with its terms, the buyer may obtain relief under this section
without regard to the rescission offer.
(10) No person who has made or engaged in the performance of any
contract in violation of any provision of this article or any rule or order
under this article or who has acquired any purported right under any such
contract with knowledge of the facts by reason of which the making or
performance of any such contract was in violation may base any suit on the
contract.
(11) Any condition, stipulation, or provision binding any person
acquiring or disposing of any security to waive compliance with any provision of
this article or any rule or order under this article is void.
(12) The rights and remedies provided by this article may be pleaded
and proved in the alternative and are in addition to any other rights or
remedies that may exist at law or in equity, but this article does not create
any cause of action not specified in this section or section 11-51-602.
(13) Any person liable under this section may seek and obtain
contribution from other persons liable under this section, directly or
indirectly, for the same violation. Contribution shall be awarded by the court
in accordance with the actual relative culpabilities of the various persons so
liable.
(14) In the case of a willful violation of or a willful refusal to
comply with or obey an order issued by the securities commissioner to any person
pursuant to section 11-51-410 or 11-51-606, the district court of the city and
county of Denver, upon application by the securities commissioner, may issue to
the person an order requiring that person to appear before the court regarding
such violation or refusal. If the securities commissioner establishes by a
preponderance of the evidence that the person willfully violated or willfully
refused to comply with or obey the order, the court may impose legal and
equitable sanctions as are available to the court in the case of contempt of
court and as the court deems appropriate upon such person.
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CONNECTICUT UNIFORM SECURITIES ACT
SECTION 36b-16. REGISTRATION OF SECURITY PRIOR TO OFFER OR SALE
REQUIRED; EXEMPTION.
No person shall offer or sell any security in this state unless (1)
it is registered under sections 36b-2 to 36b-33, inclusive, as amended by
this Act, (2) the security or transaction is exempted under section 36b-21,
as amended by section 11 of this Act, or (3) the security is a covered
security provided such person complies with any applicable requirements in
subsections (c), (d) and (e) of section 36b-21, as amended by section 11 of
this Act.
SECTION 36b-29. BUYER'S REMEDIES.
(a) Any person who: (1) Offers or sells a security in violation of
subsection (a) of section 36b-6, 36b-16 or subsection (b) of section 36b-24
or of any regulation or order under section 36b-22 which requires the
affirmative approval of sales literature before it is used, or of any
condition imposed under subsection (d) of section 36b-18 or subsection (g) or
(h) of section 36b-19; or (2) offers or sells or materially assists any
person who offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they
are made, not misleading, who knew or in the exercise of reasonable care
should have known of the untruth or omission, the buyer not knowing of the
untruth or omission, and who does not sustain the burden of proof that he did
not know, and in the exercise of reasonable care could not have known, of the
untruth or omission, is liable to the person buying the security, who may sue
either at law or in equity to recover the consideration paid for the
security, together with interest at eight per cent per year from the date of
payment, costs and reasonable attorneys' fees, less the amount of any income
received on the security, upon the tender of the security, or for damages if
he no longer owns the security.
(b)(1) Any person who violates subsection (a) of section 36b-5 and
(2) any investment adviser who violates subsection (b) or (c) of section
36b-5, the registration requirement in subsection (c) of section 36b-6, or
subsection (b) of section 36b-24, shall be liable to the recipient of
investment advisory services for any consideration paid by the recipient for
those services and any loss resulting from the investment advisory services
provided, less any profits earned by the recipient through transactions
effected as a result of the advice rendered, plus interest at the rate of
eight per cent per year from the date of payment of the consideration, costs
and reasonable attorney's fees.
(c) Every person who directly or indirectly controls a person liable
under subsections (a) and (b) of this section, every partner, officer or
director of such a person, every person occupying a similar status or
performing similar functions, every employee of such a person who materially
aids in the act or transaction constituting the violation and every
broker-dealer or agent who materially aids in the act or transaction
constituting the violation are also liable jointly and severally with and to
the same extent as such person, unless the person who is so liable sustains
the burden of proof that he did not know, and in exercise of reasonable care
could not have known, of the existence of the facts by reason of which the
liability is alleged to exist. There shall be contribution as in cases of
contract among the several persons so liable.
(d) Any tender specified in this section may be made at any time
before entry of judgment.
(e) Every cause of action under sections 36b-2 to 36b-33, inclusive,
survives the death of any person who might have been a plaintiff or defendant.
(f) No person may bring an action under this section more than two
years after the date of the contract of sale or of the contract for
investment advisory services, except that (1) with respect to actions arising
out of intentional misrepresentation or fraud in the purchase or sale of any
interest in any limited partnership not required to be registered under the
Securities Act of 1933, no person may bring an action more than one year from
the date when the misrepresentation or fraud is discovered, except that no
such action may be brought more than five years from the date of such
misrepresentation or fraud provided, with respect to an action pending on
July 1, 1993, that asserts facts upon which a claim could be asserted under
this section on and after July 1, 1993, and which claim is asserted prior to
January 1, 1994, no such action may be brought for intentional
misrepresentation or fraud that occurred more than five years prior to the
date of the filing of the complaint in such action, and (2) with respect to
actions arising out of intentional misrepresentation or fraud in the purchase
or sale of securities other than securities described in subdivision (1) of
this subsection, no person may bring an action more than one year from the
date when the misrepresentation or fraud is discovered or in the exercise of
reasonable care should have been discovered, except that no such action may
be brought more than three years from the date of such misrepresentation or
fraud.
(g) No person may bring an action under subsection (a) of this
section: (1) If the buyer received a written offer, before suit and at a time
when he owned the security, to refund the consideration paid together with
interest at six percent per year from the date of payment, less the amount of
any income received on the security, and he failed to accept
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the offer within thirty days of its receipt, or (2) if the buyer received
such an offer before bringing a cause of action and at a time when he did not
own the security, unless he rejected the offer in writing within thirty days
of its receipt.
(h) No person who has made or engaged in the performance of any
contract in violation of any provision of sections 36b-2 to 36b-33,
inclusive, or any regulation or order thereunder, or who has acquired any
purported right under any such contract with knowledge of the facts by reason
of which its making or performance was in violation, may base any cause of
action on the contract.
(i) Any condition, stipulation or provision binding any person
acquiring any security or receiving investment advice to waive compliance
with any provision of sections 36b-2 to 36b-33, inclusive, or any regulation
or order thereunder is void.
(j) The rights and remedies provided by sections 36b-2 to 36b-33,
inclusive, are in addition to any other rights or remedies that may exist at
law or in equity.
DISTRICT OF COLUMBIA SECURITIES ACT
[NO PROVISION REQUIRING REGISTRATION OF SECURITIES.]
FLORIDA SECURITIES AND INVESTOR PROTECTION ACT
SECTION 517.07. REGISTRATION OF SECURITIES.
(1) It is unlawful and a violation of this chapter for any person to
sell or offer to sell a security within this state unless the security is
exempt under section 517.051, is sold in a transaction exempt under section.
517.061, is a federal covered security, or is registered pursuant to this
chapter.
(2) No securities that are required to be registered under this
chapter shall be sold or offered for sale within this state unless such
securities have been registered pursuant to this chapter and unless prior to
each sale the purchaser is furnished with a prospectus meeting the
requirements of rules adopted by the department.
(3) The department shall issue a permit when registration has been
granted by the department. A permit to sell securities is effective for 1
year from the date it was granted. Registration of securities shall be deemed
to include the registration of rights to subscribe to such securities if the
application under section 517.081 or section 517.082 for registration of such
securities includes a statement that such rights are to be issued.
(4) A record of the registration of securities shall be kept in the
office of the department, in which register of securities shall also be
recorded any orders entered by the department with respect to such
securities. Such register, and all information with respect to the securities
registered therein, shall be open to public inspection.
(5) Notwithstanding any other provision of this section, offers of
securities required to be registered by this section may be made in this
state before the registration of such securities if the offers are made in
conformity with rules adopted by the department.
SECTION 517.211. REMEDIES AVAILABLE IN CASES OF UNLAWFUL SALE.
(1) Every sale made in violation of either section 517.07 or section
517.12 may be rescinded at the election of the purchaser; and the person
making the sale and every director, officer, partner, or agent of or for the
seller, if the director, officer, partner, or agent has personally
participated or aided in making the sale, is jointly and severally liable to
the purchaser in an action for rescission, if the purchaser still owns the
security, or for damages, if the purchaser has sold the security. No
purchaser otherwise entitled will have the benefit of this subsection who has
refused or failed, within 30 days of receipt, to accept an offer made in
writing by the seller, if the purchaser has not sold the security, to take
back the security in question and to refund the full amount paid by the
purchaser or, if the purchaser has sold the security, to pay the purchaser an
amount equal to the difference between the amount paid for the security and
the amount received by the purchaser on the sale of the security, together,
in either case, with interest on the full amount paid for the security by the
purchaser at the legal rate, pursuant to section 55.03, for the period from
the date of payment by the purchaser to the date of repayment, less the
amount of any income received by the purchaser on the security.
(2) Any person purchasing or selling a security in violation of
section 517.301, and every director, officer, partner, or agent of or for the
purchaser or seller, if the director, officer, partner, or agent has
personally participated or aided in making the sale or purchase, is jointly
and severally liable to the person selling the security to or purchasing the
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security from such person in an action for rescission, if the plaintiff still
owns the security, or for damages, if the plaintiff has sold the security.
(3) In an action for rescission:
(a) A purchaser may recover the consideration paid for the security
or investment, plus interest thereon at the legal rate, less the amount of
any income received by the purchaser on the security or investment upon
tender of the security or investment.
(b) A seller may recover the security upon tender of the
consideration paid for the security, plus interest at the legal rate, less
the amount of any income received by the defendant on the security.
(4) In an action for damages brought by a purchaser of a security or
investment, the plaintiff shall recover an amount equal to the difference
between:
(a) The consideration paid for the security or investment, plus
interest thereon at the legal rate from the date of purchase; and
(b) The value of the security or investment at the time it was
disposed of by the plaintiff, plus the amount of any income received on the
security or investment by the plaintiff.
(5) In an action for damages brought by a seller of a security, the
plaintiff shall recover an amount equal to the difference between:
(a) The value of the security at the time of the complaint, plus the
amount of any income received by the defendant on the security; and
(b) The consideration received for the security, plus interest at
the legal rate from the date of sale.
(6) In any action brought under this section, including an appeal,
the court shall award reasonable attorneys' fees to the prevailing party
unless the court finds that the award of such fees would be unjust.
GEORGIA SECURITIES ACT OF 1973
SECTION 10-5-5. REGISTRATION OF SECURITIES; WHEN AND HOW REQUIRED;
DELIVERY OF PROSPECTUS; PURCHASER'S RIGHT OF RESCISSION.
(a) Generally. It shall be unlawful for any person to offer for sale
or to sell any securities to any person in this state unless:
(1) They are subject to an effective registration statement under
this chapter;
(2) The security or transaction is exempt under Code Section 10-5-8
or Code Section 10-5-9, respectively; or
(3) The security is a federal covered security.
SECTION 10-5-12. UNLAWFUL PRACTICES.
(a) It shall be unlawful for any person:
(1) To offer to sell or to sell any security in violation of Code
Section 10-5-3, 10-5-5, or 10-5-19 or any rule, regulation, or order
promulgated or issued by the commissioner under this chapter;
SECTION 10-5-14. CIVIL LIABILITIES FROM SALES OF SECURITIES.
(a) Any person who violates subsection (a) of Code Section 10-5-12
shall be liable to the person buying such security; and such buyer may sue in
any court of competent jurisdiction to recover the consideration paid in cash
(or the fair value thereof at the time the consideration was paid if such
consideration was not paid in cash) for the security with interest thereon
from the date of payment down to the date of repayment as computed in
paragraph (1) of subsection (d) of this Code section (less the amount of any
income received thereon), together with all taxable court costs and
reasonable attorney's fees, upon the tender, where practicable, of the
security at any time before the entry of judgment, or for damages if he no
longer owns the security. Damages are the amount which equals the difference
between the fair value of the consideration the buyer gave for the security
and the fair value of the security at the time the buyer disposed of it, plus
interest thereon from the date of payment down to the date of repayment as
computed in paragraph (2) of subsection (d) of this Code section. A person
who offers or sells a security in violation of paragraph (2) of subsection
(a) of Code Section 10-5-12 is not liable under this subsection if:
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(1) The purchaser knew of the untrue statement of a material fact or
omission of a statement of a material fact; or
(2) The seller did not know and in the exercise of reasonable care
could not have known of the untrue statement or misleading omission.
(b) Every contract between a certified public accountant who holds
himself out as a "financial planner" or an "investment adviser" and an
advisory client or between an investment adviser and an advisory client made
in violation of any provision of this chapter and every such contract
heretofore or hereafter made, the performance of which involves the violation
of or continuance of any relationship or practice in violation of any
provision of this chapter or any rule, regulation, or order thereunder, shall
be void:
(1) As regards the rights of any person who, in violation of any
such provision, rule, regulation, or order shall have made or engaged in the
performance of any such contract; and
(2) As regards the rights of any person who, not being a party to
such contract, shall have acquired any right thereunder with actual knowledge
of the facts by reason of which the making or performance of such contract
was in violation of any such provision.
The advisory client who is a party to such a contract may sue to
recover the consideration paid under such contract to such investment adviser
or investment adviser representative, together with interest thereon at the
annual rate of 6 percent from the date of payment of the consideration, plus
costs and reasonable attorney's fees.
(c) Every person who directly or indirectly controls a person liable
under subsection (a), (b), or (h) of this Code section, every general
partner, executive officer, or director of such person liable under
subsection (a), (b), or (h) of this Code section, every person occupying a
similar status or performing similar functions, and every dealer, limited
dealer, salesman, or limited salesman who participates in any material way in
the sale is liable jointly and severally with and to the same extent as the
person whose liability arises under subsection (a), (b), or (h) of this Code
section unless the person whose liability arises under this subsection
sustains the burden of proof that he did not know and in the exercise of
reasonable care could not have known of the existence of the facts by reason
of which liability is alleged to exist. There is contribution as in the case
of contract among several persons so liable.
(d) With respect to the purchase, sale, or offer to purchase or sell
a security, no person may sue under this Code section more than two years
from the date of the contract for sale or sale, if there is no contract for
sale. With respect to the purchase, sale, or offer to purchase or sell a
security, no person may sue under this Code section:
(1) If the buyer received a written offer, before suit and at a time
when he owned the security, to repay in cash or by certified or official bank
check, within 30 days from the date of acceptance of such offer in exchange
for the securities, the fair value of the consideration paid (determined as
of the date such payment was originally paid by the buyer), together with
interest on such amount for the period from the date of payment down to the
date of repayment, such interest to be computed in case the security consists
of an interest-bearing obligation at the same rate as provided in the
security or, in case the security consists of other than an interest-bearing
obligation, at the rate of 6 percent per annum, less, in every case, the
amount of any income received on the security, and:
(A) Such offeree does not accept the offer within 30 days of its
receipt; or
(B) If such offer was accepted, the terms thereof were complied with
by the offeror; or
(2) If the buyer received a written offer before suit and at a time
when he did not own the security to repay in cash or by certified or official
bank check, within 30 days from the date of acceptance of such offer, an
amount equal to the difference between the fair value of the consideration
the buyer gave for the security and the fair value of the security at the
time the buyer disposed of it, together with interest on such amount for the
period from the date of payment down to the date of repayment, such interest
to be computed in case the security consists of an interest-bearing
obligation at the same rate as provided in the security or, in case the
security consists of other than an interest-bearing obligation, at the rate
of 6 percent per annum, less, in every case, the amount of any income
received on the security, and:
(A) Such offeree does not accept the offer within 30 days of its
receipt; or
(B) If such offer was accepted, the terms thereof were complied with
by the offeror, provided no written offer shall be effective within the
meaning of this subsection unless it would be exempt under Code Section
10-5-9 or, if registration would have been required, then unless such
rescission offer has been registered and effected under a subsection of Code
Section 10-5-5. Any person who is paid for his security in the amount
provided by this subsection shall be foreclosed from asserting any remedies
under this chapter regardless of whether the other requirements of this
subsection have been complied with.
(e) With respect to the activities of a certified public accountant
who holds himself out as a "financial planner" or an "investment adviser" or
an investment adviser or investment adviser representative, no person may sue
under this Code section more than two years from the date of the transaction
upon which the suit is based.
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(f) Every cause of action under this chapter survives the death of
any person who might have been a plaintiff or defendant.
(g) Nothing in this chapter shall limit any statutory or common-law
right of any person in any court for any act involving the sale of a security.
(h) Any designated dealer or designated salesman who materially
violates Code Section 10-5-4 or 10-5-5 or subsection (a) or (d) of Code
Section 10-5-12 with respect to a transaction involving a designated security
shall be liable to the person buying such security for:
(1) The consideration paid in cash (or the fair value of the
consideration paid at the time it was paid if such consideration was not paid
in cash) for such security with interest thereon from the date of payment to
the date of repayment as computed under paragraph (1) of subsection (d) of
this Code section, less the amount of any income paid thereon, upon the
tender of the security at any time before the entry of judgment;
(2) An additional amount equal to three times the amount calculated
pursuant to paragraph (1) of this subsection; and
(3) Court costs and reasonable attorney's fees.
(i) The form of action provided by Code Section 9-11-23 may be used
in any action brought pursuant to subsection (h) of this Code section, and,
in such case, it shall be conclusively presumed that a class of persons
numbering ten or more who purchased the same designated security from or
through the same designated dealer or designated salesman shall constitute a
class so numerous as to make it impracticable to bring them all before the
courts.
HAWAII UNIFORM SECURITIES ACT
SECTION 485-8. REGISTRATION OF SECURITIES.
It shall be unlawful for any person to sell or offer to sell in the
state, any securities except of a class exempt under section 485-4 or unless
sold or offered in any transaction exempt under section 485-6 or unless it is
federal covered security, unless the security has been registered by
notification or by qualification as hereinafter provided. Registration of
stock shall be deemed to include the registration of rights to subscribe to
the stock if the notice under section 485-9 or the application under section
485-10 includes a statement that the rights are to be issued. A record of the
registration of securities shall be kept in a register of securities to be
kept in the office of the commissioner of securities in which register also
shall be recorded any notice filings made pursuant to section 485-A and any
orders entered by the commissioner with respect to the securities. The
register and all information with respect to the securities registered
therein shall be open to public inspection.
SECTION 485-20. REMEDIES.
(a) Sales voidable when and by whom. Every sale made in violation of
this chapter shall be voidable at the election of the purchaser; and the
person making the sale and every director, officer, or agent of or for the
seller, if the director, officer, or agent has personally participated or
aided in any way in making the sale, shall be jointly and severally liable to
the purchaser in an action at law in any court of competent jurisdiction upon
tender of the securities sold or of the contract made for the full amount
paid by the purchaser, with interest, together with all taxable court costs
(and reasonable attorney's fees); provided that notwithstanding any law to
the contrary, no action shall be brought for the recovery of the purchase
price after five years from the date of sale or after two years from the
discovery of facts constituting the violations, but in any event after seven
years from the date of the sale; and provided further that no purchaser
otherwise entitled shall claim or have the benefit of this section who has
refused or failed within thirty days from the date thereof to accept an offer
in writing of the seller to take back the security in question and to refund
the full amount paid by the purchaser, together with interest on the amount
for the period from the date of payment by the purchaser down to the date of
repayment, such interest to be computed:
(1) In case the securities consist of interest-bearing obligations,
at the same rate as provided in the obligations; and
(2) In case the securities consist of other than interest-bearing
obligations, at the rate of ten percent a year; less, in every case, the
amount of any income from the securities that may have been received by the
purchaser.
(b) Action on bond. Any person having a right of action against a
dealer or salesperson under this section shall have a right of action under
the bond provided in section 485-14.
(c) Registration in good faith. A registration by notification made
in good faith and after the commissioner of securities, on application, has
given tentative consent to such registration, shall not, as to sales made
prior to revocation
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of the registration, result in the liabilities prescribed in this section,
although the securities may not be entitled to such registration.
IDAHO SECURITIES ACT
SECTION 30-1446. CIVIL LIABILITIES -- SURVIVAL AND LIMITATION OF
ACTIONS WAIVER OF ACT VOID.
(1) Any person who offers or sells a security in violation of any
provisions of sections 30-1416 through 30-1431, Idaho Code, transacts
business in violation of the provisions of section 30-1406, Idaho Code,
except section 30-1406(4), Idaho Code, or offers to sell or sells a security
by means of any untrue statement of a material fact or any omission to state
a material fact necessary in order to make the statements made, in the light
of the circumstances under which they are made, not misleading (the buyer not
knowing of the untruth or omission) and who does not sustain the burden of
proof that he did not know, and in the exercise of reasonable care could not
have known, the untruth or omission is liable to the person buying the
security from him, who shall be entitled to sue either at law or in equity to
recover the consideration paid for the security, together with interest at
six per cent (6%) per annum from the date of payment, costs, and reasonable
attorneys' fees, less the amount of any income received on the security, upon
the tender of the security, or for damages if he no longer owns the security.
Damages shall be the amount that would be recoverable upon a tender less (a)
the value of the security when the buyer disposed of it, and (b) interest at
six per cent (6%) per annum from the date of disposition.
(2) Every person who directly or indirectly controls a seller liable
under subsection (1) of this section, every partner, officer or director or
person occupying a similar status or performing similar functions or employee
of such a seller and every broker-dealer or salesman who participates or
materially aids in the sale is liable jointly and severally with and to the
same extent as the seller if such person knew, or in the exercise of
reasonable care could have known, of the existence of the facts by reason of
which the liability is alleged to exist. There shall be contribution among
the several persons so liable.
(3) Any tender specified in this section may be made at any time
before entry of judgment. A cause of action under this statute survives the
death of any person who might have been a plaintiff or a defendant. No person
may sue under this section more than three (3) years after the contract of
sale. No person may sue under this section (a) if the buyer has received a
bona fide offer in writing at a time when he owned the security, to refund
the consideration paid together with interest at six percent (6%) per annum
from the date of payment, less the amount of any income received on the
security, and failed to accept such offer within thirty (30) days of its
receipt, or (b) if the buyer has received a bona fide offer in writing at a
time when he did not own the security in the amount that would be recoverable
under this section upon a tender less; (i) the value of the security when the
buyer disposed of it and, (ii) interest at six percent (6%) per annum from
the date of disposition, and failed to accept such offer within thirty (30)
days of its receipt.
(4) No person who has made or engaged in the performance of any
contract in violation of any provision of this chapter or any rule or order
hereunder or who has acquired any purported right under any such contract
with knowledge of the facts by reason of which its making or performance was
in violation, may base any suit on such contract. Any condition, stipulation
or provision binding any person acquiring any security to waive compliance
with any provision of this chapter or any rule or order hereunder is void as
against public policy and in the public interest.
ILLINOIS SECURITIES LAW OF 1953
SECTION 5. REGISTRATION OF SECURITIES.
All securities except those set forth under Section 2a of this Act,
or those exempt under Section 3 of this Act, or those offered or sold in
transactions exempt under Section 4 of this Act, or face amount certificate
contracts required to be registered under Section 6 of this Act, or
investment fund shares required to be registered under Section 7 of this Act,
shall be registered either by coordination or by qualification, as
hereinafter in this Section provided, prior to their offer or sale in this
State.
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SECTION 13. PRIVATE AND OTHER CIVIL REMEDIES; SECURITIES.
A. Every sale of a security made in violation of the provisions of
this Act shall be voidable at the election of the purchaser exercised as
provided in subsection B of this Section; and the issuer, controlling person,
underwriter, dealer or other person by or on behalf of whom said sale was
made, and each underwriter, dealer or salesperson who shall have participated
or aided in any way in making the sale, and in case the issuer, controlling
person, underwriter or dealer is a corporation or unincorporated association
or organization, each of its officers and directors (or persons performing
similar functions) who shall have participated or aided in making the sale,
shall be jointly and severally liable to the purchaser as follows:
(1) for the full amount paid, together with interest from the date
of payment for the securities sold at the rate of the interest or dividend
stipulated in the securities sold (or if no rate is stipulated, then at the
rate of 10% per annum) less any income or other amounts received by the
purchaser on the securities, upon offer to tender to the seller or tender
into court of the securities sold or, where the securities were not received,
of any contract made in respect of the sale, or
(2) if the purchaser no longer owns the securities, for the amounts
set forth in clause (1) of this subsection A less any amounts received by the
purchaser for or on account of the disposition of the securities.
If the purchaser shall prevail in any action brought to enforce any
of the remedies provided in this subsection, the court shall assess costs
together with the reasonable fees and expenses of the purchaser's attorney
against the defendant. Any provision of this subsection A to the contrary
notwithstanding, the civil remedies provided in this subsection A shall not
be available against any person by reason of the failure to file with the
Secretary of State, or on account of the content of, any report of sale
provided for in subsection G or P of Section 4, paragraph (2) of subsection D
of Sections 5 and 6 or paragraph (2) of subsection F of Section 7 of this Act.
B. Notice of any election provided for in subsection A of this
Section shall be given by the purchaser within 6 months after the purchaser
shall have knowledge that the sale of the securities to him or her is
voidable, to each person from whom recovery will be sought, by registered
mail or certified mail, return receipt requested, addressed to the person to
be notified at his or her last known address with proper postage affixed, or
by personal service.
C. No purchaser shall have any right or remedy under this Section
who shall fail, within 15 days from the date of receipt thereof, to accept an
offer to repurchase the securities purchased by him or her for a price equal
to the full amount paid therefor plus interest thereon and less any income
thereon as set forth in subsection A of this Section. Every offer of
repurchase provided for in this subsection shall be in writing, shall be
delivered to the purchaser or sent by registered mail or certified mail,
return receipt requested, addressed to the purchaser at his or her last known
address, and shall offer to repurchase the securities sold for a price equal
to the full amount paid therefor plus interest thereon and less any income
thereon as set for in subsection A of this Section. Such offer shall continue
in force for 15 days from the date on which it was received by the purchaser,
shall advise the purchaser of his or her rights and the period of time
limited for acceptance thereof, and shall contain such further information,
if any, as the Secretary of State may prescribe. Any agreement not to accept
or refusing or waiving any offer made during or prior to said 15 days shall
be void.
D. No action shall be brought for relief under this Section or upon
or because of any of the matters for which relief is granted by this Section
after 3 years from the date of sale; provided, that if the party bringing the
action neither know nor in the exercise of reasonable diligence should have
known of any alleged violation of subsection E, F, G, H, I or J of Section 12
of this Act which is the basis for the action, the 3 year period provided
herein shall begin to run upon the earlier of:
(1) the date upon which the party bringing the action has actual
knowledge of the alleged violation of this Act; or
(2) the date upon which the party bringing the action has notice of
facts which in the exercise of reasonable diligence would lead to actual
knowledge of the alleged violation of this Act; but in no event shall the
period of limitation so extended be more than 2 years beyond the expiration
of the 3 year period otherwise applicable.
E. The term purchaser as used in this Section shall include the
personal representative or representatives of the purchaser.
F. Anything in this Act to the contrary notwithstanding and in
addition to all other remedies, the Secretary of State through the Office of
the Attorney General may bring an action in any circuit court of the State of
Illinois in the name and on behalf of the State of Illinois against any
person or persons participating in or about to participate in a violation of
this Act to enjoin those persons who are continuing or doing any act in
violation of this Act or to enforce compliance with this Act. Upon a proper
showing the court may grant a permanent or preliminary injunction or
temporary restraining order without bond, and may order the defendant to make
an offer of rescission of any sales or purchases of securities determined by
the court to be unlawful under this Act. The court shall further have
jurisdiction and authority, in addition to the other penalties and remedies
in this Act provided, to act or appoint another person as a receiver,
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conservator, ancillary receiver or ancillary conservator for the defendant or
the defendant's assets located in this State and may assess costs against the
defendant for the use of the State.
G.
(1) Whenever any person has engaged or is about to engage in any
act or practice constituting a violation of this Act, any party in interest
may bring an action in the circuit court of the county in which the party in
interest may bring an action in the circuit court of the county in which the
party in interest resides, or where the person has his, her or its principal
office or registered office or where any part of the transaction has or will
take place, to enjoin that person from continuing or doing any act in
violation of or to enforce compliance with this Act. Upon a proper showing,
the court shall grant a permanent or preliminary injunction or temporary
restraining order or rescission of any sales or purchases of securities
determined to be unlawful under this Act, and may assess costs of the
proceedings against the defendant.
(2) A copy of the complaint shall be served upon the Secretary of
State within one business day of filing in the form and manner prescribed by
the Secretary of Sate by rule or regulation; provided, that the failure to
comply with this provision shall not invalidate the action which is the
subject of the complaint.
H. Any provision of this Section 13 to the contrary notwithstanding,
neither the civil remedies provided in subsection A of this Section 13 nor
the remedies of rescission and appointment of a receiver, conservator,
ancillary receiver or ancillary conservator provided in subsection I of
Section 11 of this Act and in subsections F and G of this Section 13 of this
Act nor the remedies of restitution, damages or disgorgement of profits
provided in subsection I of Section 11 of this Act shall be available against
any person by reason of the failure to file with the Secretary of State, or
on account of the contents of, any notice filing under Section 2a of the Act
or subsection C-5 of Section 8 of this Act or any report of sale provided for
in subsection G or P of Section 4, paragraph (2) of subsection D of Sections
5 and 6, or paragraph (2) of subsection F of Section 7 of this Act.
INDIANA CODE
SECTION 23-2-1-3. It is unlawful for any person to offer or sell any
security in Indiana unless:
(1) it is registered under this chapter;
(2) the security or transaction is exempted under section 2 of this
chapter; or
(3) it is a federal covered security.
SECTION 23-2-1-19. (a) A person who offers or sells a security in
violation of this chapter, and who does not sustain the burden of proof that
the person did not know and in the exercise of reasonable care could not have
known of the violation, is liable to any other party to the transaction who
did not knowingly participate in the violation or who did not have, at the
time of the transaction, knowledge of the violation, who may sue either at
law or in equity to rescind the transaction or to recover the consideration
paid, together, in either case, with interest as computed in subsection
(g)(1), plus costs, and reasonable attorney's fees, less the amount of any
cash or other property received on the security upon the tender of the
security by the person bringing the action or for damages if the person no
longer owns the security. Damages are the amount that would be recoverable
upon a tender less:
(1) the value of the security when the buyer disposed of the
security; and
(2) the interest as computed in subsection (g)(1) on the value of
the security from the date of disposition.
(b) A person who purchases a security in violation of this chapter,
and who does not sustain the burden of proof that the person did not know and
in the exercise of reasonable care could not have known of the violation, is
liable to any other party to the transaction who did not knowingly
participate in the violation or who did not have, at the time of the
transaction, knowledge of the violation. The other party to the transaction
may bring an action to rescind the transaction or for damages, together, in
either case, with reasonable attorney's fees, upon the tender of the
consideration received by the person bringing the action.
(c) A person who, for compensation, engages in the business of
advising others, either directly or through publications or writings, as to
the value of securities or as to the advisability of investing in,
purchasing, or selling securities, or who, for compensation and as a part of
a regular business, issues analyses or reports concerning securities and:
(1) violates section 8, 12.1(b), or 14 of this chapter;
(2) employs a device, scheme, or artifice to defraud a person; or
(3) engages in an act that operates or would operate as fraud or
deceit upon a person;
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is liable to the other person, who may bring an action to recover any
consideration paid for advice, any loss due to advice, interest at eight
percent (8%) each year from the date consideration was paid, costs, and
reasonable attorney's fees less the value of cash or property received due to
the advice. It is a defense to an action brought for a violation of section
12.1(b) of this chapter that the person accused of the violation did not know
of the violation and, exercising reasonable care, could not have known of the
violation.
(d) A person who directly or indirectly controls a person liable
under subsection (a), (b), or (c), a partner, officer, or director of the
person, a person occupying a similar status or performing similar functions,
an employee of a person who materially aids in the conduct creating the
liability, and a broker-dealer or agent who materially aids in the conduct
are also liable jointly and severally with and to the same extent as the
person, unless the person who is liable sustains the burden of proof that the
person did not know, and in the exercise of reasonable care could not have
known, of the existence of the facts by reason of which the liability is
alleged to exist. There is contribution as in cases of contract among the
several persons liable.
(e) A tender specified in this section may be made at any time
before entry of judgment.
(f) A cause of action under this statute survives the death of a
person who might have been a plaintiff or defendant.
(g) Action under this section shall be commenced within three (3)
years after discovery by the person bringing the action of a violation of
this chapter, and not afterwards. No person may sue under this section:
(1) if that person received a written offer, before suit and at a
time when the person owned the security, to refund the consideration paid
together with interest on that amount from the date of payment to the date of
repayment, with interest on:
(A) interest-bearing obligations to be computed at the same rate as
provided on the security; and
(B) all other securities at the rate of eight percent (8%) per year;
less the amount of any income received on the security, and the person failed
to accept the offer within thirty (30) days of its receipt; or
(2) if the person received an offer before suit and at a time when
the person did not own the security, unless the person rejected the offer in
writing within thirty (30) days of its receipt.
(h) No person who has made or engaged in the performance of a
contract in violation of this chapter or a rule or order under this chapter,
or who has acquired a purported right under a contract with knowledge of the
facts by reason of which its making or performance was in violation, may base
a suit on the contract.
(i) A condition, stipulation, or provision binding a person
acquiring a security to waive compliance with this chapter or a rule or order
under this chapter is void.
(j) The rights and remedies specifically prescribed by this chapter
are the only rights and remedies created by this chapter, but are in addition
to any other rights or remedies that exist at law or in equity.
IOWA UNIFORM SECURITIES ACT
SECTION 502.201. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this
state unless
1. It is registered under this chapter; or
2. The security or transaction is exempted under section 502.202 or
502.203.
3. It is a federal covered security.
SECTION 502.501. VIOLATION OF REGISTRATION AND RELATED REQUIREMENTS.
1. Any person who:
a. Violates section 502.201, subsection 1 or 2, or section 502.208,
subsection 12, or section 502.406, subsection 2, paragraph "b", or
b. Violates any material condition imposed under section 502.208, or
c. Offers or sells a security at any time when such person has
committed a material violation of section 502.301, or
d. Commits a material violation of any order issued by the
administrator under this chapter, shall be liable to the person purchasing
the security offered or sold in connection with such violation, who may sue
either at law or in
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equity to recover the consideration paid for the security, together with
interest at the legal rate from the date of payment, costs and reasonable
attorneys' fees, less the amount of any income or distributions, in cash or
in kind, received on the security, upon the tender of the security, or for
damages if the purchaser no longer owns the security. Damages shall be the
amount that would be recoverable upon a tender less
(1) The value of the security when the purchaser disposed of it and
(2) Interest on said value at the legal rate from the date of
disposition. Any person on whose behalf an offering is made and any
underwriter of the offering, whether on a best efforts or a firm commitment
basis, shall be jointly and severally liable under this section, but in no
event shall any underwriter be liable in any suit or suits authorized under
this section for damages in excess of the total price at which the securities
underwritten by it and distributed to the public were offered to the public.
Tender requires only notice of willingness to exchange the security for the
amount specified. Any notice may be given by service as in civil actions or
by certified mail addressed to the last known address of the person liable.
2. Any person who violates section 502.211 shall be liable to the
person selling the security to such violator, which seller may sue either at
law or in equity to recover the security, costs and reasonable attorney's
fees, plus any income or distributions, in cash or in kind, received by the
purchaser thereon, upon tender of the consideration received, or for damages
if the purchaser no longer owns the security. Damages shall be the excess of
the value of the security when the purchaser disposed of it, plus interest at
the legal rate from the date of disposition, over the consideration paid for
the security. Tender requires only notice of willingness to pay the amount
specified in exchange for the security. Any notice may be given by service as
in civil actions or by certified mail to the last known address of the person
liable.
3. In addition to other remedies provided in this chapter, in a
proceeding alleging a violation of sections 502.211 through 502.218 the court
may provide that all shares acquired from a resident of this state in
violation of any provision of this chapter or rule or order issued pursuant
to this chapter be denied voting rights for one year after acquisition, that
the shares be nontransferable on the books of the target company, or that
during this one-year period the target company have the option to call the
shares for redemption either at the price at which the shares were acquired
or at book value per share as of the last day of the fiscal quarter ended
prior to the date of the call for redemption, which redemption shall occur on
the date set in the call notice but not later than sixty days after the call
notice is given.
SECTION 502.504. TIME LIMITATIONS ON RIGHTS OF ACTION.
1. No action shall be maintained to enforce any liability created
under either section 502.501 or section 502.503, subsection 1 insofar as it
relates to section 502.501 unless brought within two years after the
violation upon which it is based.
2. No action shall be maintained to enforce any liability created
under either section 502.502 or section 502.503, subsection 1, insofar as it
relates to section 502.502, unless brought within the shorter of the
following two periods:
a. Five years after the act or transaction constituting the
violation; or
b. Two years after the plaintiff receives actual notice of, or upon
the exercise of reasonable diligence should have known of, the facts
constituting the violation.
3. No Action shall be maintained to enforce any right of
indemnification or contribution created by section 502.503, subsection 2
unless brought within one year after final judgment based upon the liability
for which the right of indemnification or contribution exists.
4. No purchaser may commence an action under sections 502.501,
502.502 or 502.503 if:
a. Before suit is commenced, the purchaser has received a written
offer:
(1) Stating in reasonable detail why liability under such section
may have arisen and fairly advising the purchaser of the purchaser's rights;
(2) Offering to repurchase the security for cash, payable on
delivery of the security, equal to the consideration paid, together with
interest at the legal rate from the date of payment, less the amount of any
income or distributions, in cash or in kind, received thereon or, if the
purchaser no longer owns the security, offering to pay the purchaser upon
acceptance of the offer an amount in cash equal to the damages computed in
accordance with section 502.502, subsection 1; and
(3) Stating that the offer may be accepted by the purchaser at any
time within a specified period of not less than thirty days after the date of
receipt thereof, or such shorter period as the administrator may by rule
prescribe; and
b. The purchaser has failed to accept such offer in writing within
the specified period.
5. No seller may commence an action under sections 502.501, 502.502
or 502.503 if:
a. Before suit is commenced, the seller has received a written offer:
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(1) Stating in reasonable detail why liability under such section may
have arisen and fairly advising the seller of the seller's rights;
(2) Offering to return the security plus the amount of any income or
distributions, in cash or in kind, received thereon upon payment of the
consideration received, or, if the purchaser no longer owns the security,
offering to pay the seller upon acceptance of the offer an amount in cash equal
to the damages computed in accordance with section 502.502, subsection 2; and
(3) Stating that the offer may be accepted by the seller at any time
within a specified period of not less than thirty days after the date of receipt
thereof, or such shorter period as the administrator may by rule prescribe; and
b. The seller has failed to accept the offer in writing within the
specified period.
6. Offers under subsections 4 or 5 shall be in the form and contain the
information the administrator by rule prescribes. Every offer under either
subsection shall be delivered to the offeree personally or sent by certified
mail addressed to the offeree at the offeree's last known address. If an offer
is not performed in accordance with its terms, suit by the offeree under
sections 502.501, 502.502 or 502.503 shall be permitted without regard to
subsections 4 and 5 of this section.
KANSAS SECURITIES ACT
SECTION 17-1255. UNLAWFUL TO SELL OR OFFER FOR SALE CERTAIN
UNREGISTERED SECURITIES; PENALTY.
(a) It is unlawful for any person to offer or sell any security in this
state, unless:
(1) It is registered under this act;
(2) the security or transaction is exempt under K.S.A. 17-1261 or
17-1262, and amendments thereto; or
(3) it is a federal covered security for which the fee has been paid
and documents have been filed as required by K.S.A. 1997 Supp. 17-1270a.
(b) A conviction for an intentional violation of this section is a
severity level 7, nonperson felony. Any violation of this section committed on
or after July 1, 1993, resulting in a loss of $25,000 or more, regardless of its
location on the sentencing grid block, shall have a presumptive sentence of
imprisonment.
SECTION 17-1268. CIVIL LIABILITIES.
(a) Any person, who offers or sells a security in violation of
K.S.A. 17-1254 or 17-1255, and amendments thereto, or offers or sells a
security by means of any untrue statement of a material fact or any omission
to state a material fact necessary in order to make the statements made in
the light of the circumstances under which they are made not misleading (the
buyer not knowing of the untruth or omission) and who does not sustain the
burden of proof that such person did not know and in the exercise of
reasonable care could not have known of the untruth or omission, is liable to
the person buying the security from such person, who may sue either at law or
in equity to recover the consideration paid for the security, together with
interest at 15% per annum from the date of payment, costs, and reasonable
attorney fees, less the amount of any income received on the security, upon
the tender of the security, or for damages if the buyer no longer owns the
security. Damages are the amount that would be recoverable upon a tender less:
(1) The value of the security when the buyer disposed of it; and (2)
interest at 15% per annum from the date of disposition.
(b) Every person who directly or indirectly controls a seller liable
under subsection (a), every partner, officer, or director (or person occupying a
similar status or performing similar functions) or employee of such a seller who
materially aids in the sale, and every broker-dealer or agent who materially
aids in the sale is also liable jointly and severally with and to the same
extent as the seller, unless the nonseller who is so liable sustains the burden
of proof that such nonseller did not know, and in the exercise of reasonable
care could not have known, of the existence of the facts by reason of which the
liability is alleged to exist. There is contribution as in cases of contract
among the several persons so liable.
(c) Any tender specified in this section may be made at any time before
entry of judgment. Every cause of action under this statute survives the death
of any person who might have been a plaintiff or defendant. No person may sue
under this section if:
(1) The buyer received a written offer, before suit and at a time when
the buyer owned the security, to refund the consideration paid, together with
interest at 15% per annum from the date of payment, less the amount of any
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income received on the security, and the buyer failed to accept the offer within
30 days of its receipt; or (2) the buyer received such an offer before suit and
at a time when the buyer did not own the security, unless the buyer rejected the
offer in writing within 30 days of its receipt.
(d) No person who has made or engaged in the performance of any
contract in violation of any provision of this act or any rule and regulation or
order hereunder, or who has acquired any purported right under any such contract
with knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract. Any condition, stipulation, or
provision binding any person acquiring any security or receiving any investment
advice to waive compliance with any provision of this act or any rule and
regulation or order hereunder is void.
SECURITIES ACT OF KENTUCKY
SECTION 292.340. REGISTRATION OF SECURITIES.
It is unlawful for any person to offer or sell any security in this
state, unless the security is registered under this chapter, or the security or
transaction is exempt under this chapter, or the security is a covered security.
SECTION 292.480. CIVIL LIABILITIES.
(1) Any person, who offers or sells a security in violation of this
chapter or of any rules or orders promulgated hereunder or offers or sells a
security by means of any untrue statement of a material fact or any omission to
state a material fact necessary in order to make the statements made in the
light of the circumstances under which they are made not misleading (the buyer
nor knowing of the untruth or omission) and who does not sustain the burden of
proof that he did not know and in the exercise of reasonable care could not have
known of the untruth or omission is liable to the person buying the security
from him, who may sue either at law or in equity to recover the consideration
paid for the security, together with interest at the legal rate from the date of
payment costs and reasonable attorneys' fees, less the amount of any income
received on the security, upon the tender of the security, or for damages if he
no longer owns the security. Damages are the amount that would be recoverable
upon a tender less (a) the value of the security when the buyer has disposed of
it and (b) interest at the legal rate from the date of disposition.
(2) Any person who purchases a security in violation of the chapter or
of any administrative regulations or orders promulgated under this chapter or
who purchases a security by means of any untrue statement of a material fact or
any omission to state a material fact necessary in order to make the statements
made in light of the circumstances under which they are made not misleading, the
seller not knowing of the untruth or omission, and who does not sustain the
burden of proof that he did not know and in the exercise of reasonable care
could not have known of the untruth or omission is liable to the person selling
the security to him, who may sue either at law or in equity for:
(a) A return of the security, together with any income received by the
purchaser on the security, costs, and reasonable attorney's fees, upon a tender
of the full amount of the consideration received for the security; or
(b) If the purchaser no longer owns the security, the difference
between the fair value of the security at the date of the transaction and the
consideration received for the security, together with interest on the
difference at the legal rate compounded annually from the date of the
transaction, and costs and reasonable attorney's fees.
(3) For purposes of paragraph (b) of subsection (2) of this section,
when the purchaser no longer owns the security, if a seller seeking relief under
paragraph (b) of subsection (2) of this section offers and presents admissible
evidence of the highest intermediate value of the subject security as of some
specific date occurring within a reasonable period of time after the date of the
sale of the security but no later than the date an action under paragraph (b) of
subsection (2) of this section is filed, or of the total consideration received
by the purchaser in a subsequent sale of that security, it shall be presumed
until rebutted by a preponderance of evidence to the contrary that the value or
sale price, as applicable, is the fair value of the security at the date of the
transaction as those terms are used in paragraph (b) of subsection (2) of this
section to measure damages. For purposes of subsections (1) and (2) of this
section and all other provisions of this chapter, statements and omissions may
be either oral or written.
(4) Every person who directly or indirectly controls a seller or
purchaser liable under subsection (1) or (2) of this section, every partner,
officer or director (or person occupying a similar status or performing similar
functions) or employee of a seller or purchaser who materially aids in the sale
or purchase, and every broker-dealer or agent who materially aids in the sale or
purchase is also liable jointly and severally with and to the same extent as the
seller or purchaser, unless the nonseller or nonpurchaser who is so liable
sustains the burden of proof that he did not know, and in the exercise of
reasonable care could not have known, of the existence of the facts by reason of
which the liability is alleged to exist. There is contribution as in cases of
contract among the several persons so liable.
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(5) Any tender specified in this section may be made at any time before
entry of judgement. Every cause of action under this statute survives the death
of any person who might have been a plaintiff or defendant. No person may sue
under this section more than three (3) years after the occurrence of the act,
omission, or transaction constituting a violation of this chapter. No person may
sue under this section:
(a) If the buyer received a written offer, before suit and at a time
when he owned the security, to refund the consideration paid together with
interest at the legal rate from the date of payment, less the amount of any
income received on the security, and he failed to accept the offer within thirty
(30) days of its receipt;
(b) If the buyer received an offer before suit and at a time when he
did not own the security, unless he rejected the offer in writing within thirty
(30) days of its receipt; or
(c) If paragraph (b) of subsection (2) or this section applies, and if
the seller received a written offer before suit equal to the difference between
the greater of the highest intermediate value of the security of the
consideration received by the purchaser upon disposal of the security and the
consideration received by the seller for the security, together with interest on
the difference at the legal rate from the date of the transaction; or if
paragraph (a) of subsection (2) of this section applies, and if the seller
received a written offer to return the security together with any income
received by the purchaser on the security; and in either case he failed to
accept the offer within thirty (30) days of its receipt.
(6) No person who has made or engaged in the performance of any
contract in violation of any provision of this chapter or any rule or order
hereunder, or who has acquired any purported right under any contract with
knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract. Any condition, stipulation or
provision binding any person acquiring any security to waive compliance with any
provision of this chapter or any rule or order hereunder is void.
(7) The rights and remedies provided by this section are in addition to
any other rights or remedies that may exist at law or in equity.
LOUISIANA SECURITIES LAW
SECTION 51:705. REGISTRATION OF SECURITIES; WHEN AND HOW REQUIRED;
DELIVERY OF PROSPECTUS.
A. Generally. It shall be unlawful for any person to offer for sale or
to sell any securities to any person in this state unless:
(1) They are subject to an effective registration statement under this
Part; or
(2) The security or transaction is exempt under R.S. 51:708 or
R.S. 51:709.
SECTION 51:712. UNLAWFUL PRACTICES.
A. It shall be unlawful for any person:
(1) To offer to sell or to sell any security in violation of
R.S. 51:703, 705, or any rule, regulation or order promulgated or issued by
the commissioner under this Part.
(2) To offer to sell or to sell a security by means of any oral or
written untrue statement of a material fact or any omission to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading, the buyer not knowing
of the untruth or omission, if such person shall not sustain the burden of proof
that he did not know, and in the exercise of reasonable care could not have
known, of the untruth or omission.
(3) To offer or sell any security:
(a) Registered under R.S. 51:705(B) by means of any prospectus except a
prospectus which complies with R.S. 51:705(B)(3).
(b) Registered under R.S. 51:705(E) by means of any prospectus except a
prospectus which complies with R.S. 51:705(E)(3).
(c) Registered under R.S. 51:705(F) by means of any prospectus except a
prospectus which complies with R.S. 51:705(F)(4).
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SECTION 51:714. CIVIL LIABILITY FROM SALES OF SECURITIES.
A. Any person who violates R.S. 51:712(A) shall be liable to the person
buying such security, and such buyer may sue in any court to recover the
consideration paid in cash or, if such consideration was not paid in cash, the
fair value thereof at the time such consideration was paid for the security with
interest thereon from the date of payment down to the date of repayment as
computed in R.S. 51:714(C)(1), less the amount of any income received thereon,
together with all taxable court costs and reasonable attorney's fees, upon the
tender, where practicable, of the security at any time before the entry of
judgment, or for damages if he no longer owns the security. Damages are the
amount which equals the difference between the fair value of the consideration
the buyer gave for the security and the fair value of the security at the time
the buyer disposed of it, plus interest thereon from the date of payment to the
date of repayment as computed in R.S. 51:714(C)(2).
B. Every person who directly or indirectly controls a person liable
under Subsection A of this Section, every general partner, executive officer, or
director of such person liable under Subsection A of this Section, every person
occupying a similar status or performing similar functions, and every dealer or
salesman who participates in any material way in the sale is liable jointly and
severally with and to the same extent as the person liable under Subsection A of
this Section unless the person whose liability arises under this Subsection
sustains the burden of proof that he did not know and in the exercise of
reasonable care could not have known of the existence of the facts by reason of
which liability is alleged to exist. There is contribution as in the case of
contract among several persons so liable.
C. (1) No person may sue under this Section more than two years from
the date of the contract for sale or sale, if there is no contract for sale. No
person may sue under this Section:
(a) If the buyer received a written offer, before suit and at a time
when he owned the security, to repay in cash or by certified or official bank
check, within thirty days from the date of acceptance of such offer in exchange
for the securities, the fair value of the consideration paid, determined as of
the date such payment was originally paid by the buyer, together with interest
on such amount for the period from the date of payment to the date of repayment,
such interest to be computed in case the security consists of an
interest-bearing obligation, at the same rate as provided in the security or, in
case the security consists of other than an interest-bearing obligation, at the
applicable rate of legal interest, less, in every case, the amount of any income
received on the security, and:
(i) Such offeree does not accept the offer within thirty days of its
receipt or
(ii) If such offer was accepted, the terms thereof were complied with
by the offeror;
(b) If the buyer received a written offer before suit and at a time
when he did not own the security to repay in cash or by certified or official
bank check, within thirty days from the date of acceptance of such offer, an
amount equal to the difference between the fair value of the consideration
the buyer gave for the security and the fair value of the security at the
time the buyer disposed of it, together with interest on such amount for the
period from the date of payment down to the date of repayment, such interest
to be computed in case the security consists of an interest-bearing
obligation at the same rate as provided in the security or, in case the
security consists of other than an interest-bearing obligation, at the
applicable rate of legal interest, less, in every case, the amount of any
income received on the security, and
(i) Such offeree does not accept the offer within thirty days of its
receipt or
(ii) If such offer was accepted, the terms thereof were complied
with by the offeror
Provided, that no written offer shall be effective within the
meaning of this Subsection unless, if it were an offer to sell securities, it
would be exempt under R.S. 51:709 or, if registration would have been
required, then unless such rescission offer has been registered and effected
under R.S. 51:705. Any person who is paid for his security in the amount
provided by this Subsection shall be foreclosed from asserting any remedies
under this Part, regardless of whether the other requirements of this
Subsection have been complied with.
D. Every cause of action under this Part survives the death of any
person who might have been a plaintiff or defendant.
E. Nothing in this Part shall limit any statutory or civil right of
any person to bring action in any court for any act involved in the sale of
securities or the right of this state to punish any person for any violation
of any law. The attorney general and each of the district attorneys
throughout this state, with regard to violation of this Part in their
respective districts, shall lend full assistance to the commissioner in any
investigations or prosecutions that the commissioner may deem necessary under
the provisions of this Part.
REVISED MAINE SECURITIES ACT
SECTION 10605. CIVIL LIABILITY.
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1. Offer or sale of security. Any person who offers or sells a security
in violation of section 10201, 10205, 10301, 10401 or 10405, subsection 8, or
any rule of the administrator relating to those sections or any condition
imposed under section 10405, subsection 7, is liable to the person purchasing
the security from that person. The person purchasing the security may sue to
recover the consideration paid for the security, together with interest at the
legal rate from the date of payment, costs and reasonable attorneys' fees less
the amount of any income received on the security, upon the tender of the
security, or for damages plus costs and reasonable attorneys' fees if the person
no longer owns the security. Damages are the amount that would be recoverable
upon a tender less the value of the security when the purchaser disposed of it
and interest at the legal rate from the date of disposition. Tender shall
require only notice of willingness to exchange the security for the amount
specified. A person who offers or sells a security in violation of
section 10201, subsection 2, is not liable under this subsection if the
purchaser knew of the untrue statement of a material fact or omission of a
statement of a material fact; or the person sustains the burden of proof to
establish that the person did not know and in the exercise of reasonable care
could not have known of the untrue statement or omission.
2. Purchase of a security. Any person who purchases a security in
violation of section 10201, subsection 2, is liable to the person selling the
security to that person. The person selling the security may sue to recover the
security, plus any income received by the purchaser on the security upon tender
of the consideration received, costs and reasonable attorneys' fees, or for
damages plus costs and reasonable attorneys' fees if the purchaser no longer
owns the security. Damages are the excess of the value of the security when the
purchaser acquired it, plus interest at the legal rate on that amount from the
date of disposition, over the consideration paid for the security plus any
income received on the security. Tender requires only notice of willingness to
pay the amount specified in exchange for the security. A person who purchases a
security in violation of section 10201, subsection 2, is not liable under this
subsection if the seller knew of the untrue statement of a material fact or
omission of a statement of a material fact; or the person sustains the burden of
proof to establish that the person did not know and in the exercise of
reasonable care could not have known of the untrue statement or omission.
3. Control persons. Every person who directly or indirectly controls
another person liable under subsection 1 or 2, every partner, officer or
director of that other person, every person occupying a similar status or
performing similar functions, every employee of that other person who materially
aids in the act or transaction constituting the violation and every
broker-dealer or sales representative who materially aids in the act or
transaction constituting the violation is also liable jointly and severally with
and to the same extent as that other person, unless the person otherwise
secondarily liable under this Act proves that the person did not know, and in
the exercise of reasonable care could not have known, of the existence of the
facts by reason of which the liability is alleged to exist. There is
contribution as in cases of contract among the several persons so liable.
SECTION 10606. CIVIL STATUTE OF LIMITATIONS.
No person may sue under section 10605, unless suit is brought within 2
years after the violation, except that, if liability arises under subchapter II,
suit must be brought within 2 years after the discovery of the violation or
after discovery should have been made by the exercise of reasonable diligence.
SECTION 10607. RESCISSION AND SETTLEMENT OFFERS.
1. Purchaser. No purchaser may commence an action under section 10605
if, before suit is commenced, the purchaser has received a written offer:
A. Stating the respect in which liability under section 10605 may have
arisen and fairly advising the purchaser of the purchaser's rights;
B. Offering to repurchase the security for cash, payable on delivery of
the security, equal to the consideration paid, together with interest at the
legal rate from the date of payment, less the amount of any income received
thereon, or, if the purchaser no longer owns the security, offering to pay the
purchaser upon acceptance of the offer an amount in cash equal to the damages
computed in accordance with section 10605, subsection 1; and
C. Stating that the offer may be accepted by the purchaser at any time
within a specified period of not less than 30 days after the date of its receipt
by the purchaser.
2. Seller. No seller may commence an action under section 10605 if,
before suit is commenced, the seller has received a written offer:
A. Stating the respect in which liability under section 10605 may have
arisen and fairly advising the seller of the seller's rights;
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B. Offering to return the security, plus the amount of any income
received on the security, upon payment of the consideration received, or, if the
purchaser no longer owns the security, offering to pay the seller upon
acceptance of the offer an amount in cash equal to the damages computed in
accordance with section 10605, subsection 2; and
C. Providing that the offer may be accepted by the seller at any time
within a specified period of not less than 30 days after the date of its receipt
by the seller.
3. Form of offer. The administrator, by rule, may prescribe the form in
which the information specified in subsections 1 and 2 shall be contained in any
offer made under subsection 1 or 2.
4. Delivery of offer. Every offer under subsection 1 or 2 shall be
delivered to the offeree or sent by certified mail to the offeree at the
offeree's last known address.
5. Statute of limitation tolled. If an offer is not performed in
accordance with its terms, suit by the offeree under section 10605 shall be
permitted without regard to this section and the statute of limitations shall
toll from the time of receipt of the offer until 60 days after the rescission or
settlement offer was to have been performed.
MARYLAND SECURITIES ACT
SECTION 11-501. REGISTRATION REQUIREMENT.
A person may not offer or sell any security in this State unless:
(1) The security is registered under this title;
(2) The security or transaction is exempted under Subtitle 6 of this
title; or
(3) The security is a federal covered security.
SECTION 11-703. CIVIL LIABILITIES.
(a) When seller, purchaser or advisor liable. (1) A person is civilly
liable to the person buying a security from him if he:
(i) Offers or sells the security in violation of Section 11-304(b),
Section 11-401(a), Section 11-402(a), or Section 11-501 of this title, or of
any rule or order under Section 11-205 of this title which requires the
affirmative approval of sales literature before it is used; or
(ii) Offers or sells the security by means of any untrue statement
of a material fact or any omission to state a material fact necessary in
order to make the statements made, in the light of the circumstances under
which they are made, not misleading, the buyer not knowing of the untruth or
omission, and if he does not sustain the burden of proof that he did not
know, and in the exercise of reasonable care could not have known, of the
untruth or omission.
(2) A person is civilly liable to the person selling a security to him
if he offers to purchase or purchases the security by means of any untrue
statement of a material fact or any omission to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
they are made, not misleading, the seller not knowing of the untruth or
omission, and if he does not sustain the burden of proof that he did not know,
and in the exercise of reasonable care could not have known, of the untruth or
omission.
(3) A person is civilly liable to another person if the person:
(i) Acts as an investment adviser or representative in violation of
Section 11-302(c), Section 11-401(b), Section 11-402(b), or Section 11-304(b)
of this title or any rule or order promulgated under it, except that an
action based on a violation of Section 11-402(b) of this title may not be
maintained except by those persons who directly received advice from the
unregistered investment adviser representative; or
(ii) Receives, directly or indirectly, any consideration from
another person for advice as to the value of securities or their purchase or
sale or for acting as an investment adviser or representative under Section
11-101(h) and (i) of this title, whether through the issuance of analyses,
reports, or otherwise, and employs any device, scheme, or artifice to defraud
such other person or engages in any act, practice or course of business which
operates or would operate as a fraud or deceit on such other person.
(b) Extent of liability. (1) A buyer may sue either at law or in
equity:
(i) On tender of the security, to recover the consideration paid for
the security, together with interest at the rate provided for in Section
11-107(a) of the Courts and Judicial Proceedings Article, as amended, from
the date of payment, costs, and reasonable attorneys' fees, less the amount
of any income received on the security; or
(ii) If he no longer owns the security, for damages.
(2) A seller may sue either at law or in equity:
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(i) On tender of the consideration paid for the security, to recover
the security, together with the amount of any income received on the security,
costs, and reasonable attorneys' fees; or
(ii) If the buyer no longer owns the security, for damages.
(3) For the purposes of subsection (b)(1)(ii) of this section, damages
are the amount that would be recoverable on a tender less the value of the
security when the buyer disposed of it and interest at the rate provided for in
Section 11-107(a) of the Courts and Judicial Proceedings Article, as amended,
from the date of disposition.
(4)
(i) In any action brought under subsection (a)(3) of this section a
person may sue either at law or in equity for the rescission of the advisory
contract and any damages resulting from the violation, together with interest at
the rate provided for in Section 11-107(a) of the Courts and Judicial
Proceedings Article, as amended, from the date of payment of the
consideration, costs, and reasonable attorneys' fees, less the amount of any
income received from such advice.
(ii) An action based on a violation of Section 11-302(c) of this title
may not prevail where the person accused of the violation sustains the burden
of proof that he did not know, and in the exercise of reasonable care could
not have known, of the existence of the facts by reason of which the
liability is alleged to exist.
(c) Others jointly and severally liable with seller or purchaser.
(1) Every person who directly or indirectly controls a person liable
under subsection (a) of this section, every partner, officer, or director of
the person liable, every person occupying a similar status or performing
similar functions, every employee of the person liable who materially aids in
the conduct giving rise to the liability, and every broker-dealer or agent
who materially aids in such conduct are also liable jointly and severally
with and to the same extent as the person liable, unless able to sustain the
burden of proof that he did not know, and in exercise of reasonable care
could not have known, of the existence of the facts by reason of which the
liability is alleged to exist.
(2) There is contribution as in cases of contract among the several
persons so liable.
(d) Time of making tender. Any tender specified in this section may be
made at any time before entry of judgment.
(e) Survival of cause of action. Every cause of action under this
statute survives the death of any person who might have been a plaintiff or
defendant.
(f) Limitation of actions; effect of offer of refund.
(1) A person may not sue under subsections (a)(1) and (2) of this
section after the earlier to occur of 3 years after the contract of sale or
purchase or the time specified in paragraph (2) of this subsection.
(2) An action may not be maintained:
(i) To enforce any liability created under subsection (a)(1)(i) of this
section, unless brought within one year after the violation on which it is
based; or
(ii) To enforce any liability created under subsection (a)(1)(ii) or
(2) of this section, unless brought within one year after the discovery of the
untrue statement or omission, or after the discovery should have been made by
the exercise of reasonable diligence.
(3) A person may not sue under subsection (a)(3) of this section more
than 3 years after the date of the advisory contract or the rendering of
investment advice, or the expiration of 2 years after the discovery of the facts
constituting the violation, whichever first occurs.
(4) A person may not sue under this section:
(i) If the buyer received a written offer, before suit and at a time
when he owned the security or asset, to refund the consideration paid
together with interest at the rate provided for in Section 11-107(a) of the
Courts and Judicial Proceedings Article, as amended, from the date of
payment, less the amount of any income received on the security or asset, and
he failed to accept the offer within 30 days of its receipt;
(ii) If the buyer received the offer before suit and at a time when he
did not own the security or asset, unless he rejected the offer in writing
within 30 days of its receipt; or
(iii) If the seller received a written offer from the buyer, before
suit, to return the security or asset, together with the amount of any income
received on the security, less interest at the rate provided for in
Section 11-107(a) of the Courts and Judicial Proceedings Article, as amended,
from the date of payment, and he failed to accept the offer within 30 days of
its receipt.
(g) Effect of making or performing contract with knowledge of facts. A
person may not base any suit on any contract if he:
(1) Has made or engaged in the performance of the contract in violation
of any provision of this title or any rule or order under this title; or
(2) Has acquired any purported right under the contract with knowledge
of the facts by reason of which its making or performance was in violation.
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(h) Provision for waiver of compliance with section void. Any
condition, stipulation, or provision binding any person acquiring any security
or asset or receiving any investment advice to waive compliance with any
provision of this title or any rule or order under this title is void.
(i) Rights and remedies additional to others. The rights and remedies
provided by this title are in addition to any other rights or remedies that may
exist at law or in equity, but this title does not create any cause of action
not specified in this section or Section 11-410 of this title.
MASSACHUSETTS UNIFORM SECURITIES ACT
SECTION 301. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in the
commonwealth unless (1) it is registered under this chapter or (2) the security
or transaction is exempted under section 402.
SECTION 410. CIVIL LIABILITIES.
(a) Any person who
(1) offers or sells a security in violation of section 201(a), 301, or
405(b), or of any rule or order under section 403 which requires the affirmative
approval of sales literature before it is used, or of any condition imposed
under section 303(d), or
(2) offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they are
made, not misleading, the buyer not knowing of the untruth or omission, and who
does not sustain the burden of proof that he did not know, and in the exercise
of reasonable care could not have known, of the untruth or omission, is liable
to the person buying the security from him, who may sue either at law or in
equity to recover the consideration paid for the security, together with
interest at six per cent per year from the date of payment, costs, and
reasonable attorneys' fees, less the amount of any income received on the
security, upon the tender of the security, or for damages if he no longer owns
the security. Damages are the amount that would be recoverable upon a tender
less the value of the security when the buyer disposed of it and interest at six
per cent per year from the date of disposition.
(b) Every person who directly or indirectly controls a seller liable
under subsection (a), every partner, officer, or director of such a seller,
every person occupying a similar status or performing similar functions, every
employee of such a seller who materially aids in the sale, and every
broker-dealer or agent who materially aids in the sale are also liable jointly
and severally with and to the same extent as the seller, unless the non-seller
who is so liable sustains the burden of proof that he did not know, and in
exercise of reasonable care could not have known, of the existence of the facts
by reason of which the liability is alleged to exist. There is contribution as
in cases of contract among the several persons so liable.
(c) Any tender specified in this section may be made at any time before
entry of judgment.
(d) Every cause of action under this statute survives the death of any
person who might have been a plaintiff or defendant.
(e) No person may sue under this section more than four years after the
discovery by the person bringing the action of a violation of this chapter or
any rule promulgated or order issued thereunder. No person may sue under this
section (1) if the buyer received a written offer, before suit and at a time
when he owned the security, to refund the consideration paid together with
interest at six percent per year from the date of payment, less the amount of
any income received on the security, and he failed to accept the offer within
thirty days of its receipt, or (2) if the buyer received such an offer before
suit and at a time when he did not own the security, unless he rejected the
offer in writing within thirty days of its receipt.
(f) No person who has made or engaged in the performance of any
contract in violation of any provision of this chapter or any rule or order
hereunder, or who has acquired any purported right under any such contract with
knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract.
(g) Any condition, stipulation, or provision binding any person
acquiring any security to waive compliance with any provision of this chapter or
any rule or order hereunder is void.
(h) The rights and remedies provided by this chapter are in addition to
any other rights or remedies that may exist at law or in equity, but this
chapter does not create any cause of action not specified in this section.
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MICHIGAN UNIFORM SECURITIES ACT
SECTION 301. SALE OF SECURITIES; REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this
state unless (1) it is registered under this act or (2) the security or
transaction is exempted under section 402.
SECTION 410. OFFER OR SALE OF SECURITY OR COMMODITY CONTRACT;
LIABILITY; DAMAGES; CONTRIBUTION; TENDER; SURVIVAL OF ACTION; LIMITATIONS;
RESCISSION OFFER; DISCLOSURE; SUIT BASED ON CONTRACT; RIGHTS AND REMEDIES
CUMULATIVE.
(a) Any person who does either of the following shall be liable to the
person buying the security or commodity contract from him or her and the buyer
may sue either at law or in equity to recover the consideration paid for the
security or commodity contract, together with interest at 6% per year from the
date of payment, costs, and reasonable attorneys' fees, less the amount of
income received on the security or commodity contract, upon the tender of the
security or commodity contract, or, if he or she no longer owns the security or
commodity contract, for damages which shall be the amount that would be
recoverable upon a tender less the value of the security or commodity contract
when the buyer disposed of it and interest at 6% per year from the date of
disposition:
(1) Offers or sells a security or commodity contract in violation of
section 201(a), 301, or 405(b) or of any rule or order under section 403, which
requires the affirmative approval of sales literature before it is used, or of
any condition imposed under section 304(d), 305(f), 305(g), or 412(g), or
(2) Offers or sells a security or commodity contract by means of any
untrue statement of a material fact or any omission to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading, the buyer not knowing
of the untruth or omission, and who does not sustain the burden of proof that he
or she did not know, and in the exercise of reasonable care could not have
known, of the untruth or omission.
(b) Every person who directly or indirectly controls a seller liable
under subsection (a), every partner, officer, or director of such a seller,
every person occupying a similar status or performing similar functions, every
employee of such a seller who materially aids in the sale, and every
broker-dealer or agent who materially aids in the sale are also liable jointly
and severally with and to the same extent as the seller, unless the non-seller
who is so liable sustains the burden of proof that he or she did not know, and
in exercise of reasonable care could not have known, of the existence of the
facts by reason of which the liability is alleged to exist. There is
contribution as in cases of contract among the several persons so liable.
(c) Any tender specified in this section may be made at any time before
entry of judgment.
(d) Every cause of action under this statute survives the death of any
person who might have been a plaintiff or defendant.
(e) A person may not bring an action under subsection (a)(1) more than
2 years after the contract of sale. A person may not bring an action under
subsection (a)(2) more than 2 years after such person, in the exercise of
reasonable care, knew or should have known of the untruth or omission, but in no
event more than 4 years after the contract of sale. A person may not bring an
action under this section if the buyer received a written offer, before the
action and at a time when he or she owned the security or commodity contract, to
refund the consideration paid together with interest at 6% per year from the
date of payment, less the amount of any income received on the security, and he
or she failed to accept the offer within 30 days of its receipt, or if the buyer
received such an offer before the action and at a time when he or she did not
own the security or commodity contract, unless he or she rejected the offer in
writing within 30 days of its receipt. The documents making full written
disclosure about the financial and business condition of the issuer and the
financial and business risks associated with the retention of the securities or
commodities shall be provided to the offeree concurrently with the written
rescission offer. Such an offer shall not be made until 45 days after the date
of sale of the securities and acceptance or rejection of the offer shall not be
binding until 48 hours after receipt by the offeree. The rescission offer shall
recite the provisions of this section. A rescission offer under this section
shall not be valid unless the offeror substantiates that it has the ability to
fund the offering and this information is set forth in the disclosure documents.
(f) No person who has made or engaged in the performance of any
contract in violation of any provision of this act or any rule or order
hereunder, or who has acquired any purported right under any such contract with
knowledge of the facts by reason of which its making or performance was in
violation, may base any suit on the contract.
(g) Any condition, stipulation, or provision binding any person
acquiring any security or commodity contract to waive compliance with any
provision of this act or any rule or order hereunder is void.
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(h) The rights and remedies provided by this act are in addition to any
other rights or remedies that may exist at law or in equity, but this act does
not create any cause of action not specified in this section or section 202(e).
MINNESOTA SECURITIES ACT
SECTION 80A.08. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this
state unless (a) it is registered under sections 80A.01 to 80A.31 or (b) the
security or transaction is exempted under section 80A.15 or (c) it is a federal
covered security.
SECTION 80A.23. CIVIL LIABILITIES.
Subdivision 1. Any person who sells a security in violation of
sections 80A.08 or 80A.18, or of any condition imposed under section 80A.11,
subdivision 4, or 80A.12, subdivisions 5 and 6, is liable to the person
purchasing the security, who may sue either in equity for rescission upon
tender of the security or at law for damages if that person no longer owns
the security. In any action for rescission, the purchaser shall be entitled
to recover the consideration paid for the security together with interest at
the legal rate, costs, and reasonable attorney's fees, less the amount of any
income received on the securities. In an action at law, damages shall be the
consideration paid for the security together with interest at the legal rate
to the date of disposition, costs, and reasonable attorney's fees, less the
value of the security at the date of disposition.
Subd. 2. Any person who violates section 80A.01 in connection with the
purchase or sale of any security shall be liable to any person damaged thereby
who sold such security to that person or to whom that person sold such security,
and any person who violates section 80A.03 in connection with the purchase or
sale of any security shall be liable to any person damaged by the conduct
prescribed by section 80A.03. Any person who violates section 80A.02 in
connection with the purchase or sale of any security shall be liable to any
investment advisory client who is damaged thereby. Damages in an action pursuant
to this subdivision shall include the actual damages sustained plus interest
from the date of payment or sale, costs and reasonable attorney's fees.
Subd. 3. Every person who directly or indirectly controls a person
liable under subdivision 1 or 2, every partner, principal executive officer or
director of such person, every person occupying a similar status or performing a
similar function, every employee of such person who materially aids in the act
or transaction constituting the violation, and every broker-dealer or agent who
materially aids in the act or transaction constituting the violation, are also
liable jointly and severally with and to the same extent as such person. There
is contribution as in cases of contract among the several persons so liable.
Subd. 4. No person shall be liable under subdivisions 1 to 3 who shall
sustain the burden of proof that the person did not know, and in the exercise of
reasonable care could not have known, of the existence of facts by reason of
which the liability is alleged to exist.
Subd. 5. Any tender specified in this section may be made at any time
before entry of judgment. Tender by a purchaser shall require only notice of
willingness to exchange the security for the amount computed pursuant to
subdivision 1. Tender by a seller shall require only notice of willingness to
pay the amount specified in exchange for the security. Any notice may be given
by service as in civil actions or by certified mail to the last known address of
the person liable.
Subd. 6. Every cause of action under this statute survives the death of
any person who might have been a plaintiff or defendant.
Subd. 7. No person may commence an action under subdivision 1 more than
three years after the sale upon which such action is based. No person may
commence an action under subdivision 2 more than three years after the
occurrence of the act or transaction constituting the violation.
Subd. 8. No purchaser may commence an action under subdivision 1 if,
before suit is commenced, the purchaser has received a written offer to
repurchase the security for cash payable on delivery of the security equal to
the consideration paid, together with interest at the legal rate from the date
of payment, less the amount of any income received thereon or, if the purchaser
no longer owns the security, an offer to pay an amount in cash equal to the
damages computed in accordance with subdivision 1 and the purchaser has failed
to accept such offer in writing within 30 days of its receipt. No offer shall be
effective to prevent suit under this section unless a duplicate copy thereof
shall have been filed with the commissioner at least 20 days prior to its
delivery to the offeree and the commissioner shall not have objected to the
offer within that time. The offer shall be in the form and contain the
information the commissioner by rule
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or order prescribes. If the offer is not performed in accordance with its terms,
suit by the offeree under this section shall be permitted without regard to this
subdivision.
Subd. 9. No person who has made or engaged in the performance of any
contract in violation of any provision of this section or any rule or order
hereunder or has acquired any purported rights under any such contract with
knowledge of the facts by reason of which its making or performance was in
violation may base any suit on such violation under the contract.
Subd. 10. Any condition, stipulation or provision binding any person to
waive compliance with any provision of sections 80A.01 to 80A.31 or any rule or
order hereunder in the purchase or sale of any security is void.
Subd. 11. The rights and remedies promulgated by sections 80A.01 to
80A.31 are in addition to any other right or remedy that may exist at law or in
equity, but sections 80A.01 to 80A.31 do not create any cause of action not
specified in this section or section 80A.05, subdivision 5. No civil cause of
action may be based solely upon the failure of a broker-dealer or agent to
comply with the requirements of section 80A.04, subdivision 1 or 3, except a
cause of action arising under section 45.027.
MISSISSIPPI SECURITIES ACT
SECTION 75-71-401. REGISTRATION OR EXEMPTION REQUIRED.
Except as provided for in Section 75-71-109(a), it is unlawful for any
person to offer or sell any security in the State of Mississippi unless (1) it
is registered under this chapter or (2) the security or transaction is exempted
under Article 3 of this chapter.
SECTION 75-71-717. LIABILITY TO BUYERS FOR ILLEGAL OR FRAUDULENT SALES
OR OFFERS.
(a) Any person who (1) offers or sells a security in violation of
Section 75-71-117(a), 75-71-301 or 75-71-401, or of any rule or order under
Section 75-71-113 which requires the affirmative approval of sales literature
before it is used, or of any condition imposed under Section 75-71-405(d) or
75-71-417, or (2) offers or sells a security by the use of any written or oral
communication which contains any untrue statement of a material fact or any
omission to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they are made, not
misleading (the buyer not knowing of the untruth or omission), and who does not
sustain the burden of proof that he did not know, and in the exercise of
reasonable care could not have known, of the untruth or omission, is liable to
the person buying the security from him, who may sue either at law or in equity
to recover the consideration paid for the security, together with interest at
eight percent (8%) per year from the date of payment, costs and reasonable
attorneys' fees, less the amount of any income received on the security, upon
the tender of the security, or for damages if he no longer owns the security.
Damages are the amount that would be recoverable upon a tender less the value of
the security when the buyer disposed of it and interest at eight percent (8%)
per year from the date of disposition.
(b) No buyer may sue under this section if, before suit is commenced,
the buyer has received a written offer stating the respect in which liability
under this section may have arisen and fairly advising the buyer of his rights;
offering to repurchase the security for cash payable on delivery of the security
equal to the consideration paid, together with interest at six percent (6%) from
the date of payment, less the amount of any income received on the security or,
if the buyer no longer owns the security, offering to pay the buyer upon
acceptance of the offer an amount in cash equal to the damages computed in
accordance with subsection (a); and stating that the offer may be accepted by
the buyer at any time within thirty (30) days of its receipt; and the buyer has
failed to accept such offer in writing within the specified period.
SECTION 75-71-725. LIMITATION OF ACTIONS.
No action shall be maintained to enforce any liability created under
section 75-71-717(2) unless brought within two (2) years after the discovery of
the untrue statement or omission, or after such discovery should have been made
by the exercise of reasonable diligence, or, if the action is to enforce a
liability created under section 75-71-717(1) unless brought within two (2) years
after the violation upon which it is based.
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MISSOURI UNIFORM SECURITIES ACT
SECTION 409.301. REGISTRATION REQUIREMENT (SECURITIES).
It is unlawful for any person to offer or sell any security in this
state unless:
(1) It is registered under this act;
(2) The security or transaction is exempted under section 409.402; or
(3) It is a federal covered security.
SECTION 409.411. CIVIL LIABILITIES.
(a) Any person who:
(1) Offers or sells a security in violation of section 409.201(a),
409.301, or 409.405(b), or of any rule or order under section 409.403 which
requires the affirmative approval of sales literature before it is used, or
of any condition imposed under section 409.304(d), 409.305(f), or 409.305(g);
or
(2) Offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they
are made, not misleading (the buyer not knowing of the untruth or omission),
and who does not sustain the burden of proof that he did not know, and in the
exercise of reasonable care could not have known, of the untruth or omission,
is liable to the person buying the security from him, who may sue either at
law or in equity to recover the amount specified under subsection (j) of this
section.
(b) Any person who:
(1) Engages in the business of advising others, for compensation,
either directly or through publications or writings, as to the value of
securities or as to the advisability of investing in, purchasing, or selling
securities, or who, for compensation and as a part of a regular business,
issues or promulgates analyses or reports concerning securities in violation
of section 409.102, 409.201(c) or (d), 409.405(b); or
(2) Receives directly or indirectly any consideration from another
person for advice as to the value of securities or their purchase or sale,
whether through the issuance of analyses, reports or otherwise and employs
any device, scheme, or artifice to defraud such other person or engages in
any act, practice or course of business which operates or would operate as a
fraud or deceit on such other person, is liable to that person who may sue
either at law or in equity to recover the consideration paid for such advice
and any loss due to such advice, together with interest at eight percent per
year from the date of payment of the consideration plus costs and reasonable
attorney's fees, less the amount of any income received from such advice in
the amount specified in subsection (j) of this section.
(c) Every person who directly or indirectly controls a person liable
under subsections (a) and (b) of this section, including every partner,
officer, or director of such a person, every person occupying a similar
status or performing similar functions, every employee of such a person who
materially aids in the conduct giving rise to the liability, and every
broker-dealer or agent who materially aids in such conduct is also liable
jointly and severally with and to the same extent as such person, unless able
to sustain the burden of proof that he did not know, and in exercise of
reasonable care could not have known, of the existence of the facts by reason
of which the liability is alleged to exist. There is contribution as in cases
of contract among the several persons so liable.
(d) Any tender specified in this section may be made at any time
before entry of judgment.
(e) Every cause of action under this statute survives the death of
any person who might have been a plaintiff or defendant.
(f) No person may sue under this section more than three years after
the contract of sale, or the rendering of investment advice.
(g) No person may sue under this section (1) if the buyer received a
written offer, before suit and at a time when he owned the security, to
refund the consideration paid together with interest at eight percent per
year from the date of payment, less the amount of any income received on the
security, and he failed to accept the offer within thirty days of its
receipt, or (2) if the buyer received such an offer before suit and at a time
when he did not own the security, unless he rejected the offer in writing
within thirty days of its receipt.
(h) No person who has made or engaged in the performance of any
contract in violation of any provision of sections 409.101 to 409.419 or any
rule or order hereunder, or who has acquired any purported right under any
such contract with knowledge of the facts by reason of which its making or
performance was in violation, may base any suit on the contract.
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(i) Any condition, stipulation, or provision binding any person
acquiring any security or receiving any investment advice to waive compliance
with any provision of sections 409.101 to 409.419 or any rule or order
hereunder is void.
(j) The amounts recoverable by a person damaged as a result of a
violation of subsection (a) or (b) of this section shall be the consideration
paid for the purchase of the security together with interest at eight percent
per year from the date of payment, cost, and reasonable attorney's fees, less
the amount of any income received on the security, upon the tender of the
security, or for damages if he no longer owns the security. "Damages" is the
amount that would be recoverable upon the tender less the value of the
security when the buyer disposed of it and interest at eight percent per year
from the date of disposal. An action pursuant to a violation of subsection
(b) of this section may not be maintained except by those persons who
directly receive advice from the person charged with the violation. Any
recovery under subsection (b) of this section must be offset by any recovery
received from any source under subsection (a) of this section.
(k) The rights and remedies provided by sections 409.101 to 409.419
are in addition to any other rights or remedies that may exist at law or in
equity, but sections 409.101 to 409.419 do not create any cause of action not
specified in this section or section 409.202(e).
NEVADA UNIFORM SECURITIES ACT
SECTION 90.460. REGISTRATION REQUIREMENT.
It is unlawful for a person to offer to sell or sell any security in
this state unless the security is registered or the security or transaction
is exempt under this chapter.
SECTION 90.660. CIVIL LIABILITY.
1. A person who offers or sells a security in violation of any of the
following provisions:
(a) Subsection 1 of NRS 90.310;
(b) NRS 90.460;
(c) Subsection 10 of NRS 90.500;
(d) Subsection 2 of NRS 90.570;
(e) Subsection 2 of NRS 90.610; or
(f) A condition imposed in subsection 8 or 9 of NRS 90.500, is
liable to the person purchasing the security. Upon tender of the security,
the purchaser may recover the consideration paid for the security and
interest at the legal rate of this state from the date of payment, costs and
reasonable attorney's fees, less the amount of income received on the
security. A purchaser who no longer owns the security may recover damages.
Damages are the amount that would be recoverable upon a tender less the value
of the security when the purchaser disposed of it, plus interest at the legal
rate of this state from the date of disposition of the security, costs and
reasonable attorney's fees determined by the court. Tender requires only
notice of willingness to exchange the security for the amount specified.
2. A person who offers or sells a security in violation of
subsection 2 of NRS 90.570 is not liable under subsection 1 of this section
if:
(a) The purchaser knew that a statement of a material fact was
untrue or that there was an omission of a statement of a material fact; or
(b) The seller did not know and in the exercise of reasonable care
could not have known of the untrue statement or misleading omission.
3. A person who willfully participates in any act or transaction in
violation of NRS 90.580 is liable to a person who purchases or sells a
security, other than a security traded on a national securities exchange or
quoted on a national automated quotation system administered by a
self-regulatory organization, at a price that was affected by the act or
transaction for the damages sustained as a result of the act or transaction.
Damages are the difference between the price at which the securities were
purchased or sold and the market value the securities would have had at the
time of the person's purchases or sale in the absence of the act or
transaction, plus interest at the legal rate of this state from the date of
the act or transaction and reasonable attorney's fees.
4. A person who directly or indirectly controls another person who
is liable under subsection 1 or 3, a partner, officer or director of the
person liable, a person occupying a similar status or performing similar
functions, any agent of the person liable, an employee of the person liable
if the employee materially aids in the act, omission or transaction
constituting the violation, and a broker-dealer or sales representative who
materially aids in the act, omission
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or transaction constituting the violation, are also liable jointly and
severally with and to the same extent as the other person, but it is a
defense that the person did not know, and in the exercise of reasonable care
could not have known, of the existence of the facts by which the liability is
alleged to exist. With respect to a person who directly or indirectly,
controls another person who is liable under subsection 3, it is also a
defense that the controlling person acted in good faith and did not, directly
or indirectly, induce the act, omission or transaction constituting the
violation. Contribution among the several persons liable is the same as in
cases arising out of breach of contract.
SECTION 90.670. STATUTE OF LIMITATIONS.
A person may not sue under NRS 90.660 unless suit is brought within
the earliest of 1 year after the discovery of the violation, 1 year after
discovery should have been made by the exercise of reasonable care, or 5
years after the act, omission or transaction constituting the violation.
SECTION 90.680. OFFER OF RESCISSION AND SETTLEMENT.
1. Relief may not be obtained under subsection 1 of NRS 90.660 if,
before suit is commenced, the purchaser:
(a) Receives a written offer:
(1) Stating the respect in which liability under NRS 90.660 may have
arisen and fairly advising the purchaser of his rights of rescission;
(2) If the basis for relief under subsection 1 of NRS 90.660 is a
violation of subsection 2 of NRS 90.570, including financial and other
information necessary to correct all material misstatements or omissions in
the information which was required by this chapter to be furnished to the
purchaser as of the time of the sale of the security to the purchaser;
(3) Offering to repurchase the security for cash, payable on
delivery of the security, equal to the consideration paid, plus interest at
the legal rate of this state from the date of payment, less income received
thereon, or, if the purchaser no longer owns the security, offering to pay
the purchaser upon acceptance of the offer an amount in cash equal to the
damages computed under subsection 1 of NRS 90.660 plus attorney's fees; and
(4) Stating that the offer may be accepted by the purchaser at any
time within a specified period of not less than 30 days after the date of its
receipt by the purchaser or such shorter or longer time as the administrator
by order prescribes; and
(b) Fails to accept the offer in writing within the period specified
under subparagraph (4) of paragraph (a).
2. The administrator by regulation may prescribe the form in which
the information specified in subsection 1 must be contained in an offer made
under subsection 1.
3. An offer under subsection 1 must be delivered to the offeree or
sent in a manner which assures actual receipt by the offeree.
4. If, after acceptance, a rescission offer is not performed in
accordance with either its terms or this section, the offeree may obtain
relief under NRS 90.660 without regard to this section.
NEW HAMPSHIRE UNIFORM SECURITIES ACT
SECTION 421-B:11. REGISTRATION REQUIREMENT AND NOTICE FILING OF
SECURITIES.
I. It is unlawful for any person to offer or sell any security in
this state unless it is registered under this chapter, the security or
transaction is exempted under RSA 421-B:17, or it is a federal covered
security for which the fee has been paid and documents have been filed as
required by paragraph I-a of this section.
SECTION 421-B:25. CIVIL LIABILITIES.
I. Any person who sells a security in violation of RSA 421-B:11 or
421-B:20, I or of any condition imposed under RSA 421-B:14, IV or RSA
421-B:15, V, VI and VII, is liable to the person purchasing the security from
him, who may sue either in equity for rescission upon tender of the security
or at law for damages if he no longer owns the security. In any action for
rescission, the purchaser shall be entitled to recover the consideration paid
for the security together with interest at the legal rate, costs, and
reasonable attorney's fees, less the amount of any income received on the
securities. In an action at law, damages shall be the consideration paid for
the security together with interest at the legal rate to the date of
disposition, costs, and reasonable attorney's fees, less the value of the
security at the date of disposition.
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II. Any person who violates RSA 421-B:3 in connection with the
purchase or sale of any security shall be liable to any person damaged by the
violation of that section who sold such security to him or to whom he sold
such security, and any person who violates RSA 421-B:5 in connection with the
purchase or sale of any security shall be liable to any person damaged by the
conduct proscribed by RSA 421-B:5. Any person who violates RSA 421-B:4 in
connection with the purchase or sale of any security shall be liable to any
investment advisory client of his who is damaged by the violation of that
section. Damages in an action pursuant to this paragraph shall include the
actual damages sustained plus interest from the date of payment or sale,
costs, and reasonable attorney's fees.
III. Every person who directly or indirectly controls a person liable
under paragraph I or II, every partner, principal executive officer, or
director of such person, every person occupying a similar status or
performing a similar function, every employee of such person who materially
aids in the act or transaction constituting the violation, and every
broker-dealer or agent who materially aids in the acts or transactions
constituting the violation, are also liable jointly and severally with and to
the same extent as such person. There is contribution as in cases of contract
among the several persons so liable.
IV. No person shall be liable under paragraphs I and III who shall
sustain the burden of proof that he did not know, and in the exercise of
reasonable care could not have known, of the existence of facts by reason of
which the liability is alleged to exist.
V. Any tender specified in this section may be made at any time
before entry of judgment. Tender by a purchaser shall require only notice of
willingness to exchange the security for the amount computed pursuant to
paragraph I. Tender by a seller shall require only notice of willingness to
pay the amount specified in exchange for the security. Any notice may be
given by service as in civil actions or by certified mail to the last known
address of the person liable.
VI. Every cause of action under this chapter survives the death of
any person who might have been a plaintiff or defendant.
VII. A person may not recover under this section in actions commenced
more than 6 years after his first payment of money to the broker-dealer or
issuer in the contested transaction.
VIII. No purchaser may commence an action under paragraph I if, before
suit is commenced, the purchaser has received a written offer to repurchase
the security for cash payable on delivery of the security equal to the
consideration paid, together with interest at the legal rate from the date of
payment, less the amount of any income received on the security or, if the
purchaser no longer owns the security, an offer to pay an amount in cash
equal to the damages computed in accordance with paragraph I and the
purchaser has failed to accept such offer in writing within 30 days of its
receipt. No offer shall be effective to prevent suit under this section
unless a duplicate copy thereof shall have been filed with the secretary of
state at least 20 days prior to its delivery to the offeree and the secretary
of state shall not have objected to the offer within that time. The offer
shall be in the form and contain the information the secretary of state by
rule or order prescribes. If the offer is not performed in accordance with
its terms, suit by the offeree under this section shall be permitted without
regard to this subdivision.
IX. No person who has made or engaged in the performance of any
contract in violation of any provision of this section or any rule or order
under this section or has acquired any purported rights under any such
contract with knowledge of the facts by reason of which its making or
performance was in violation may base any suit on such violation under the
contract.
X. Any condition, stipulation or provision binding any person to
waive compliance with any provision of this chapter or any rule or order
under this chapter in the purchase or sale of any security is void.
XI. The rights and remedies promulgated by this chapter are in
addition to any other right or remedy that may exist at law or in equity, but
this chapter does not create any cause of action not specified in this
section or RSA 421-B:8, V. No civil cause of action may be based solely upon
the failure of a broker-dealer or agent to comply with the requirements of
RSA 421-B:6, I or III, except a cause of action arising under RSA 421-B:23.
NEW JERSEY UNIFORM SECURITIES LAW
SECTION 49:3-60. It is unlawful for any security to be offered or sold
in this State unless:
(a) The security or transaction is exempt under section 3 of P.L.1967,
c.93 (C.49:3-50);
(b) (Deleted by amendment, P.L.1997, c.276.)
(c) (Deleted by amendment, P.L.1985, c.405.)
(d) (Deleted by amendment, P.L.1985, c.405.)
(e) The security is registered under this act; or
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(f) It is a federal covered security for which a notice filing and fees
have been submitted as required by section 14 of this act (C.49:3-60.1).
SECTION 49:3-71. (a) Any person who
(1) Offers, sells or purchases a security in violation of subsection
(b) of section 8, subsection (a) of section 9 or section 13 of P.L.1967, c.93
(C.49:3-55, 49:3-56, or 49:3-60), or
(2) Offers, sells or purchases a security by means of any untrue
statement of material fact or any omission to state a material fact necessary
in order to make the statements made, in the light of the circumstances under
which they are made, not misleading (the buyer not knowing of the untruth or
omission), or
(3) offers, sells or purchases a security by employing any device,
scheme, or artifice to defraud, or
(4) offers, sells or purchases a security by engaging in any act,
practice or course of business which operates or would operate as a fraud or
deceit upon any person, or
(5) engages in the business of advising others, for compensation,
either directly or through publications or writings, as to the value of
securities, or as to the advisability of investing in, purchasing or selling
securities, or who, for compensation and as a part of a regular business,
issues or promulgates analyses or reports concerning securities (i) in
willful violation of this act or of any rule or order promulgated pursuant to
this act, or (ii) employs any device, scheme or artifice to defraud the other
person or engages in any act, practice or course of business or conduct which
operates or would operate as a fraud or deceit on the other person, is liable
as set forth in subsection (c) of this section;
(b)(1) If any claim is brought for violation of paragraph (2), (3),
(4) or (5) of subsection (a) of this section, the person who bought the
security or received the investment advice shall sustain the burden of proof
that the seller or giver of investment advice knew of the untruth or omission
and intended to deceive the buyer or recipient of investment advice and that
the buyer or recipient of investment advice has suffered a financial
detriment;
(2) If any claim is brought for violation of paragraph (2), (3), (4)
or (5) of subsection (a) of this section involving a purchase of securities
by others or investment advice as to the selling of securities, the person
who sold the security or who received the investment advice to sell the
security shall sustain the burden of proof that that person suffered a net
loss with respect to that sale or investment advice taking into account all
transactions by that person in the same security or any security convertible
into that security within one year before or after the sale or advice which
is the basis of the claim;
(c) Any person who offered, sold or purchased a security or engaged
in the business of giving investment advice to a person in violation of
paragraph (1), (2), (3), (4) or (5) of subsection (a) of this section is
liable to that person, who may bring an action either at law or in equity to
recover the consideration paid for the security or the investment advice and
any loss due to the advice, together with interest set at the rate
established for interest on judgments for the same period by the Rules
Governing the Courts of the State of New Jersey from the date of payment of
the consideration for the investment advice or security, and costs, less the
amount of any income received on the security, upon the tender of the
security and any income received from the investment advice or on the
security, or for damages if he no longer owns the security. Damages are the
amount that would be recoverable upon a tender less the value of the security
when the buyer disposed of it and interest at the rate established for
interest on judgments for the same period by the Rules Governing the Courts
of the State of New Jersey from the date of disposition;
(d) Every person who directly or indirectly controls a seller liable
under subsection (a) of this section, every partner, officer, or director of
such a seller, or investment adviser, every person occupying a similar status
or performing similar functions, every employee of such a seller or
investment adviser who materially aids in the sale or in the conduct giving
rise to the liability, and every broker-dealer, investment adviser,
investment adviser representative or agent who materially aids in the sale or
conduct are also liable jointly and severally with and to the same extent as
the seller or investment adviser, unless the nonseller who is so liable
sustains the burden of proof that he did not know, and in the exercise of
reasonable care could not have known, of the existence of the facts under
paragraphs (1) through (5) of subsection (a) of this section which give rise
to liability. There is contribution as in cases of contract among the several
persons so liable;
(e) Any tender specified in this section may be made at any time
before entry of judgment;
(f) Every cause of action under this act survives the death of any
person who might have been a plaintiff or defendant;
(g) No person may bring an action under this section more than two
years after the contract of sale or the rendering of the investment advice,
or more than two years after the time when the person aggrieved knew or
should have known of the existence of his cause of action, whichever is
later. No person may bring an action under this section (1) if the buyer
received a written offer, before suit and at a time when he owned the
security, to refund the consideration paid, together with interest at the
rate established for interest on judgments for the same period by the Rules
Governing the
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Courts of the State of New Jersey at the time the offer was made, from the
date of payment, less the amount of any income received on the security, and
he failed to accept the offer within 30 days of its receipt, or (2) if the
buyer received such an offer before suit and at a time when he did not own
the security, unless he rejected the offer in writing within 30 days of its
receipt;
(h) No person who has made or engaged in the performance of any
contract in violation of any provision of this act or any rule or order
hereunder, or who has acquired any purported right under any such contract
with knowledge of the facts by reason of which its making or performance was
in violation, may base any suit on the contract;
(i) Any condition, stipulation or provision binding any person
acquiring any security or receiving investment advice to waive compliance
with any provision of this act or any rule or order hereunder is void;
(j) The rights and remedies provided by this act are in addition to
any other rights or remedies that may exist at law or in equity, but this act
does not create any cause of action not specified in this section or
subsection (e) of section 10 of P.L.1967, c.93 (C.49:3-57).
NEW YORK BLUE SKY LAW (MARTIN ACT)
[NO PROVISION REQUIRING REGISTRATION OF SECURITIES.]
NORTH CAROLINA SECURITIES ACT
SECTION 78A-24. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this
State unless (i) it is registered under this Chapter, (ii) the security or
transaction is exempted under G.S. 78A-16 or 78A-17 and such exemption has
not been denied or revoked under G.S. 78A-18, or (iii) it is a security
covered under federal law.
SECTION. 78A-56. CIVIL LIABILITIES.
(a) Any person who:
(1) Offers or sells a security in violation of G.S. 78A-8(1), 78A,
8(3), 78A-10(b), 78A-12, 78A-24, or 78A-36(a), or of any rule or order under
G.S. 78A-49(d) which requires the affirmative approval of sales literature
before it is used, or of any condition imposed under G.S. 78A-27(d) or
78A-28(g), or
(2) Offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they
were made, not misleading (the purchaser not knowing of the untruth or
omission), and who does not sustain the burden of proof that he did not know,
and in the exercise of reasonable care could not have known, of the untruth
or omission, is liable to the person purchasing the security from him, who
may sue either at law or in equity to recover the consideration paid for the
security, together with interest at the legal rate from the date of payment,
costs, and reasonable attorneys' fees, less the amount of any income received
on the security, upon the tender of the security, or for damages if he no
longer owns the security. Damages are the amount that would be recoverable
upon a tender less the value of the security when the purchaser disposed of
it and interest at the legal rate as provided by G.S. 24-1 from the date of
disposition.
(b) Any person who purchases a security by means of any untrue
statement of a material fact or any omission to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading (the seller not
knowing of the untruth or omission), and who does not sustain the burden of
proof that he did not know, and in the exercise of reasonable care could not
have known, of the untruth or omission, shall be liable to the person selling
the security to him, who may sue either at law or in equity to recover the
security, plus any income received by the purchaser thereon, upon tender of
the consideration received, or for damages if the purchaser no longer owns
the security. Damages are the excess of the value of the security when the
purchaser disposed of it, plus interest at the legal rate from the date of
disposition, over the consideration paid for the security.
(c) Every person who directly or indirectly controls a person liable
under subsection (a) or (b), every partner, officer, or director of such a
person, every person occupying a similar status or performing similar functions,
every employee of such a person who materially aids in the act or transaction,
and every dealer or salesman who materially aids in the sale are also liable
jointly and severally with and to the same extent as such person, unless the
person who is so liable sustains the burden of proof that he did not know, and
in the exercise of reasonable care should not have known, of the existence of
the facts by reason of which the liability is alleged to exist. There is
contribution as in cases of contract among the several persons so liable.
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(d) Any tender specified in this section may be made at any time
before entry of judgment. Tender shall require only notice of willingness to
exchange the security for the amount specified. Any notice may be given by
service as in civil actions or by certified mail addressed to the last known
address of the person liable.
(e) Every cause of action under this statute survives the death of
any person who might have been a plaintiff or defendant.
(f) No person may sue under this section more than two years after
thesale or contract of sale.
(g)(1) No purchaser may sue under this section if, before suit is
commenced, the purchaser has received a written offer stating the respect in
which liability under this section may have arisen and fairly advising the
purchaser of his rights; offering to repurchase the security for cash payable
on delivery of the security equal to the consideration paid, together with
interest at the legal rate as provided by G.S. 24-1 from the date of payment,
less the amount of any income received on the security or, if the purchaser
no longer owns the security, offering to pay the purchaser upon acceptance of
the offer an amount in cash equal to the damages computed in accordance with
subsection (a); and stating that the offer may be accepted by the purchaser
at any time within 30 days of its receipt; and the purchaser has failed to
accept such offer in writing within the specified period.
(2) No seller may sue under this section if, before suit is
commenced, the seller has received a written offer stating the respect in
which liability under this section may have arisen and fairly advising the
seller of his rights; offering to return the security plus the amount of any
income received thereon upon payment of the consideration received, or, if
the purchaser no longer owns the security, offering to pay the seller upon
acceptance of the offer an amount in cash equal to the damages computed in
accordance with subsection (b); and providing that the offer may be accepted
by the seller at any time within 30 days of its receipt; and the seller has
failed to accept such offer in writing within the specified period.
(3) Offers shall be in the form and contain the information the
Administrator by rule prescribes. Every offer under subsection (g) shall be
delivered to the offeree or sent by certified mail addressed to him at his
last known address. If an offer is not performed in accordance with its
terms, suit by the offeree under this section shall be permitted without
regard to this subsection.
(h) No person who has made or engaged in the performance of any
contract in violation of any provision of this Chapter or any rule or order
hereunder, or who has acquired any purported right under any such contract
with knowledge of the facts by reason of which its making or performance was
in violation, may base any suit on the contract.
(i) Any condition, stipulation, or provision binding any person
acquiring any security to waive compliance with any provision of this Chapter
or any rule or order hereunder is void.
(j) The rights and remedies provided by this Chapter are in
addition to any other rights or remedies that may exist at law or in equity,
but this Chapter does not create any cause of action not specified in this
section or G.S. 78A-37(d).
OHIO SECURITIES ACT
SECTION 1707.43. REMEDIES OF PURCHASER IN UNLAWFUL SALE.
Every sale or contract for sale made in violation of Chapter 1707 of
the Revised Code, is voidable at the election of the purchaser. The person
making such sale or contract for sale, and every person who has participated in
or aided the seller in any way in making such sale or contract for sale, are
jointly and severally liable to such purchaser, in an action at law in any court
of competent jurisdiction, upon tender to the seller in person or in open court
of the securities sold or of the contract made, for the full amount paid by such
purchaser and for all taxable court costs, unless the court determines that the
violation did not materially affect the protection contemplated by the violated
provision.
No action for the recovery of the purchase price as provided for in
this section, and no other action for any recovery based upon or arising out of
a sale or contract for sale made in violation of Chapter 1707. of the Revised
Code, shall be brought more than two years after the plaintiff knew, or had
reason to know, of the facts by reason of which the actions of the person or
director were unlawful, or more than four years from the date of such sale or
contract for sale, whichever is the shorter period.
No purchaser is entitled to the benefit of this section who has failed
to accept, within thirty days from the date of such offer, an offer in writing
made after two weeks from the date of such sale or contract of sale, by the
seller or by any person who has participated in or aided the seller in any way
in making such sale or contract of sale, to take back the security in question
and to refund the full amount paid by such purchaser.
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OKLAHOMA SECURITIES ACT
SECTION 301. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this
state unless:
(1) it is registered under this act or the security or transaction is
exempted under Section 401 of this title; or
(2) it is a federal covered security.
SECTION 408. CIVIL LIABILITIES.
(a) Any person who:
(1) offers or sells a security in violation of Sections 201(a), 301,
or 404(b) of this title, or of any rule or order under Section 402 of this
title, or of any condition imposed under Sections 304(d), 305(f), or 305(g)
of this title; or
(2) offers or sells or purchases a security by means of any untrue
statement of a material fact or any omission to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading (the other party not
knowing of the untruth or omission), and who does not sustain the burden of
proof that he did not know, and in the exercise of reasonable care could not
have known, of the untruth or omission, is liable:
(A) in the case of an offer or sale of a security, to the person
buying the security from him, who may sue either at law or in equity to
recover the consideration paid for the security, together with interest at
ten percent (10%) per year from the date of payment, costs, and reasonable
attorneys' fees, less the amount of any income received on the security, upon
the tender of the security, or for damages if he no longer owns the security.
Damages are the amount that would be recoverable upon a tender, less the
value of the security when the buyer disposed of it, and interest at ten
percent (10%) per year from the date of disposition; or
(B) in the case of a purchase of a security, to the person selling
the security to him, who may sue at law or in equity, for a return of the
security, together with any income received by the purchaser on the security,
costs and reasonable attorneys' fees, upon a tender of the full amount of the
consideration received for the security, or, if the purchaser no longer owns
the security, for the difference between the fair value of the security at
the date of the transaction and the consideration received for the security,
together with interest on such difference at the rate of ten percent (10%)
per year from the date of the transaction, costs and reasonable attorneys'
fees.
(b) Every person who materially participates or aids in a sale or
purchase made by any person liable under paragraph (1) or (2) of subsection
(a) of this section, or who directly or indirectly controls any person so
liable, shall also be liable jointly and severally with and to the same
extent as the person so liable, unless the person who so participates, aids
or controls, sustains the burden of proof that he did not know, and could not
have known, of the existence of the facts by reason of which liability is
alleged to exist. There shall be contribution as in cases of contract among
the several persons so liable.
(c) Any person who:
(1) in violation of Sections 201(c) and 201(d) of this title,
engages in the business of advising others for compensation, either directly
or through publications or writings, as to the value of securities or as to
the advisability of investing in, purchasing, or selling securities, or who,
for compensation and as a part of a regular business, issues or promulgates
analyses or reports concerning securities, in violation of Sections 201(c)
and 201(d) of this title; or
(2) receives, directly or indirectly, any consideration from another
person for advice as to the value of securities or their purchase or sale,
whether through the issuance of analyses, reports or otherwise and employs
any device, scheme, or artifice to defraud such other person or engages in
any act, practice or course of business which operates or would operate as a
fraud or deceit on such other person, is liable to that person who may sue
either at law or in equity to recover the consideration paid for such advice
and any loss due to such advice, together with interest at ten percent (10%)
per year from the date of payment of the consideration plus costs and
reasonable attorney's fees, less the amount of any income received from such
advice.
(d) Any tender specified in this section may be made at any time
before entry of judgment.
(e) Every cause of action under this section survives the death of
any person who might have been a plaintiff or defendant.
(f) No person may sue under paragraph (1) of subsection (a) of this
section more than three (3) years after the sale. No person may sue under
paragraph (2) of subsection (a) of this section more than two (2) years after
the untruth
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or omission was discovered, but in no event more than three (3) years after the
sale. No person may sue under this section if:
(1) the buyer received a written offer, before suit and at a time
when he owned the security, to refund the consideration paid together with
interest at ten percent (10%) per year from the date of payment, less the
amount of any income received on the security, and he failed to accept the
offer within thirty (30) days of its receipt; or
(2) the buyer received such an offer before suit and at a time when
he did not own the security, unless he rejected the offer in writing within
thirty (30) days of its receipt.
(g) No person may sue under paragraph (1) of subsection (c) of this
section more than three (3) years from the date the advice was given. No
person may sue under paragraph (2) of subsection (c) of this section more
than one (1) year after the fraud or deceit was discovered, but in no event
more than three (3) years after the date the advice was given.
(h) Provided, any longer term of limitation as otherwise provided by
law shall apply to any actions brought under the Oklahoma Securities Act.
(i) No person who has made or engaged in the performance of any
contract in violation of any provision of this title or any rule or order
promulgated thereunder, or who has acquired any purported right under any
such contract with knowledge of the facts by reason of which its making or
performance was in violation, may base any suit on the contract. Any
defendant who prevails in an action brought under paragraph (1) or (2) of
subsection (a) or paragraph (1) or (2) of subsection (c) of this section may
recover his reasonable attorneys' fees and costs in the action from the
plaintiff if the court, in its discretion, determines that the action was
without substantial merit. Any plaintiff who prevails in an action brought
under paragraph (1) or (2) of subsection (a) or paragraph (1) or (2) of
subsection (c) of this section may recover his reasonable attorneys' fees and
costs in the action from the defendant.
(j) Any condition, stipulation, or provision is void if it would
bind a person acquiring any security to waive compliance with any provision
of this title, or any rule or order promulgated thereunder.
(k) The rights and remedies provided for in this title are in
addition to other rights or remedies that may exist in law or in equity;
however, no additional cause of action is created unless specified in this
section.
OREGON SECURITIES LAW
SECTION 59.055. CONDITIONS OF OFFER AND SALE OF SECURITIES.
It is unlawful for any person to offer or sell any security in this
state, unless:
(1) The security is registered and the offer or sale is not in
violation of any rule or order of the Director of the Department of Consumer
and Business Services or any condition, limitation or restriction imposed by
the director upon such registration;
(2) The security is exempt under ORS 59.025 or the sale is exempt under
ORS 59.035; or
(3) The security is a federal covered security for which
a notice has been filed and fees have been paid under ORS 59.049.
SECTION 59.115. LIABILITY IN CONNECTION WITH SALE OF SECURITIES;
RECOVERY BY PURCHASER; LIMITATIONS ON PROCEEDING; ATTORNEY FEES.
(1) A person who sells a security is liable as provided in
subsection (2) of this section to a purchaser of the security if the person:
(a) Sells a security, other than a federal covered security, in
violation of the Oregon Securities Law or of any condition, limitation or
restriction imposed upon a registration or license under the Oregon
Securities Law; or
(b) Sells a security by means of an untrue statement of a material
fact or an omission to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they are made, not
misleading (the buyer not knowing of the untruth or omission), and who does
not sustain the burden of proof that the person did not know, and in the
exercise of reasonable care could not have known, of the untruth or omission.
(2) The purchaser may recover:
(a) Upon tender of the security, the consideration paid for the
security, and interest from the date of payment equal to the greater of the
rate of interest specified in ORS 82.010 for judgments and decrees for the
payment of money or the rate provided in the security if the security is an
interest-bearing obligation, less any amount received on the security; or
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(b) If the purchaser no longer owns the security, damages in the amount
that would be recoverable upon a tender, less the value of the security when the
purchaser disposed of it and less interest on such value at the rate of interest
specified in ORS 82.010 for judgments and decrees for the payment of money from
the date of disposition.
(3) Every person who directly or indirectly controls a seller liable
under subsection (1) of this section, every partner, limited liability company
manager, including a member who is a manager, officer or director of such
seller, every person occupying a similar status or performing similar functions,
and every person who participates or materially aids in the sale is also liable
jointly and severally with and to the same extent as the seller, unless the
nonseller sustains the burden of proof that the nonseller did not know, and, in
the exercise of reasonable care, could not have known, of the existence of facts
on which the liability is based. Any person held liable under this section shall
be entitled to contribution from those jointly and severally liable with that
person.
(4) Notwithstanding the provisions of subsection (3) of this section, a
person whose sole function in connection with the sale of a security is to
provide ministerial functions of escrow, custody or deposit services in
accordance with applicable law is liable only if the person participates or
materially aids in the sale and the purchaser sustains the burden of proof that
the person knew of the existence of facts on which liability is based or that
the person's failure to know of the existence of such facts was the result of
the person's recklessness or gross negligence.
(5) Any tender specified in this section may be made at any time before
entry of judgment.
(6) Except as otherwise provided in this subsection, no action or suit
may be commenced under this section more than three years after the sale. An
action under this section for a violation of subsection (1)(b) of this section
or ORS 59.135 may be commenced within three years after the sale or two years
after the person bringing the action discovered or should have discovered the
facts on which the action is based, whichever is later. Failure to commence an
action on a timely basis is an affirmative defense.
(7) No action may be commenced under this section solely because an
offer was made prior to registration of the securities.
(8) Any person having a right of action against a broker-dealer, state
investment adviser or against a salesperson or investment adviser representative
acting within the course and scope or apparent course and scope of authority of
the salesperson or investment adviser representative, under this section shall
have a right of action under the bond or irrevocable letter of credit provided
in ORS 59.175.
(9) Subsection (4) of this section shall not limit the liability of any
person: (a) For conduct other than in the circumstances described in subsection
(4) of this section; or (b) Under any other law, including any other provisions
of the Oregon Securities Law.
(10) Except as provided in subsection (11) of this section, the court
may award reasonable attorney fees to the prevailing party in an action under
this section.
(11) The court may not award attorney fees to a prevailing defendant
under the provisions of subsection (10) of this section if the action under this
section is maintained as a class action pursuant to ORCP 32.
SECTION 59.125. EFFECT OF NOTICE OF OFFER TO REPAY PURCHASER;
EXCEPTIONS; REGISTRATION OF TRANSACTION.
(1) Except as provided in subsection (3) of this section, no action
or suit may be commenced under ORS 59.115 if the purchaser has received
before suit a written notice as outlined in subsection (2) of this section.
(2) The notice shall contain:
(a) An offer to pay the amount specified in ORS 59.115(2)(a) upon
tender of the security; and
(b) A statement of the effect on the purchaser's rights of failure to
respond as required in subsection (3) of this section.
(3) An action or suit under this section may be commenced after
receipt of a notice as outlined in subsection (2) of this section:
(a) If the purchaser owned the security when the notice was
received, accepted the payment offer within 30 days after its receipt, and
has not been paid the full amount offered; or
(b) If the purchaser did not own the security when the notice was
received and, within 30 days after receipt, gave written notice of inability
to tender back the security.
(4) An offer to repay the purchaser pursuant to this section
involves the offer or sale of a security. The transaction must be registered
under ORS 59.055 unless there is an exemption from the registration
requirement or a notice is filed under ORS 59.049.
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PENNSYLVANIA SECURITIES ACT OF 1972
SECTION 201. REGISTRATION REQUIREMENT.
It is unlawful for any person to offer or sell any security in this
State unless the security is registered under this act or the security or
transaction is exempted under section 202 or 203 hereof.
SECTION 502. VIOLATION OF REGISTRATION REQUIREMENTS.
Any person who violates section 201 or any material condition
imposed under section 206 or 207 shall be liable to the person purchasing the
security offered or sold in violation of section 201 from him who may sue
either at law or in equity to recover the consideration paid for the
security, together with interest at the legal rate from the date of payment,
less the amount of any income or distributions, in cash or in kind, received
on the security, upon the tender of the security, or for damages if he no
longer owns the security. Damages shall be the amount that would be
recoverable upon a tender less the value of the security when the purchaser
disposed of it and interest at the legal rate from the date of disposition.
Any person on whose behalf an offering is made and any underwriter of the
offering, whether on a best efforts or a firm commitment basis, shall be
jointly and severally liable under this section, but in no event shall any
underwriter be liable in any suit or suits authorized under this section for
damages in excess of the total price at which the securities underwritten by
him and distributed to the public were offered to the public. Tender requires
only notice of willingness to exchange the security for the amount specified.
Any notice may be given by service as in civil actions or by certified mail
addressed to the last known address of the person liable. No person shall be
liable under this section if the sale of the security is registered prior to
the payment or receipt of any part of the consideration for the security
sold, even though an offer to sell or a contract of sale may have been made
or entered into without registration.
SECTION 504. TIME LIMITATIONS ON RIGHTS OF ACTION.
(a) No action shall be maintained to enforce any liability created
under section 501 (or section 503 in so far as it relates to that section)
unless brought before the expiration of four years after the act or
transaction constituting the violation or the expiration of one year after
the plaintiff receives actual notice or upon the exercise of reasonable
diligence should have known of the facts constituting the violation,
whichever shall first expire.
(b) No action shall be maintained to enforce any liability created
under section 502 (or section 503 in so far as it relates to that section)
unless brought before the expiration of two years after the violation upon
which it is based or the expiration of one year after the plaintiff receives
actual notice or upon the exercise of reasonable diligence should have known
of the facts constituting such violation, whichever shall first expire.
(c) No action shall be maintained to enforce any right of
indemnification or contribution created by section 503 unless brought before
the expiration of one year after final judgment based upon the liability for
which the right of indemnification or contribution exists.
(d) No purchaser may commence an action under section 501, 502 or
503 if, before suit is commenced, the purchaser has received a written offer:
(i) stating the respect in which liability under such section may have arisen
and fairly advising the purchaser of his rights; offering to repurchase the
security for cash, payable on delivery of the security, equal to the
consideration paid, together with interest at the legal rate from the date of
payment, less the amount of any income or distributions, in cash or in kind,
received thereon or, if the purchaser no longer owns the security, offering
to pay the purchaser upon acceptance of the offer an amount in cash equal to
the damages computed in accordance with section 501(a); and (ii) stating that
the offer may be accepted by the purchaser at any time within a specified
period of not less than thirty days after the date of receipt thereof, or
such shorter period as the commission may by rule prescribe; and the
purchaser has failed to accept such offer in writing within the specified
period.
(e) No seller may commence an action under section 501, 502 or 503
if, before suit is commenced, the seller has received a written offer: (i)
stating the respect in which liability under such section may have arisen and
fairly advising the seller of his rights; (ii) offering to return the
security plus the amount of any income or distributions, in cash or in kind,
received thereon upon payment of the consideration received, or if the
purchaser no longer owns the security, offering to pay the seller upon
acceptance of the offer an amount in cash equal to the damages computed in
accordance with section 501(b); and (iii) providing that the offer may be
accepted by the seller at any time within a specified period of not less than
thirty days after the date of receipt thereof, or such shorter period as the
commission may by regulation prescribe; and the seller has failed to accept
such offer in writing within the specified period.
(f) Offers under subsection (d) or (e) of this section 504 shall be
in the form and contain the information the commission by rule prescribes.
Every offer under this subsection shall be delivered to the offeree
personally or sent by certified mail addressed to him at his last known
address. If an offer is not performed in accordance with its terms,
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suit by the offeree under section 501, 502 or 503, shall be permitted without
regard to subsections (d) and (e) of this section 504.
SOUTH CAROLINA UNIFORM SECURITIES ACT
SECTION 35-1-810. REGISTERED, EXEMPTED, OR FEDERAL COVERED SECURITY
REQUIRED.
It is unlawful for any person to offer or sell any security in this
State unless (a) it is registered under this chapter, (b) the security or
transaction is exempted under Section 35-1-310 or 35-1-320, or (c) it is a
federal covered security.
SECTION 35-1-1490. LIABILITY TO BUYERS FOR ILLEGAL OR FRAUDULENT
SALES OR OFFERS.
Any person who:
(1) offers or sells a security in violation of subsection (2) of
Section 35-1-170 or Section 35-1-410 or Section 35-1-810, or of any rule or
order under Section 35-1-50 which requires the affirmative approval of sales
literature before it is used or of any condition imposed under Section
35-1-950 or Section 35-1-990; or
(2) Offers or sells a security by means of any untrue statement of a
material fact or any omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they
are made, not misleading, the buyer not knowing of the untruth or omission,
and who does not sustain the burden of proof that he did not know, and in the
exercise of reasonable care could not have known, of the untruth or omission;
Is liable to the person buying the security from him, who may sue
either at law or in equity to recover the consideration paid for the
security, together with interest at six percent per year from the date of
payment, costs, and reasonable attorneys' fees, less the amount of any income
received on the security, upon the tender of the security, or for damages if
he no longer owns the security. Damages are the amount that would be
recoverable upon a tender less the value of the security when the buyer
disposed of it and interest at six percent per year from the date of
disposition.
SECTION 35-1-1530. LIMITATION OF ACTIONS; EFFECT OF OFFER TO REFUND
CONSIDERATION WITH INTEREST.
No person may sue under Sections 35-1-1490 and 35-1-1500 more than
three years after the contract of sale. No person may sue under either
section (a) if the buyer received a written offer, before suit and at a time
when he owned the security, to refund the consideration paid together with
interest at six percent per year from the date of payment, less the amount of
any income received on the security, and he failed to accept the offer within
thirty days of its receipt or (b) if the buyer received such an offer before
suit and at a time when he did not own the security, unless he rejected the
offer in writing within thirty days of its receipt.
TENNESSEE SECURITIES ACT OF 1980
SECTION 48-2-104. SECURITIES REGISTRATION REQUIREMENT.
It is unlawful for any person to sell any security in this state
unless:
(1) It is registered under this part;
(2) The security or transaction is exempted under Section 48-2-103;
or (3)
The security is a covered security.
SECTION 48-2-122. CIVIL LIABILITIES.
(a)(1) Any person who:
(A) Sells a security in violation of Sections 48-2-104C48-2-109,
48-2-110(f), or of any condition imposed under Section 48-2-107(g), or any
rule, or order under this part of which he has notice; or
(B) Sells a security in violation of Section 48-2-121(a) (the
purchaser not knowing of the violation of Section 48-2-121(a)); shall be
liable to the person purchasing the security from the seller to recover the
consideration paid for the security, together with interest at the legal rate
from the date of payment, less the amount of any income received on the
security, upon the tender of the security, or, if the purchaser no longer
owns the security, the amount that would be
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recoverable upon a tender, less the value of the security when the purchaser
disposed of it and interest at the legal rate form the date of disposition.
(2) Tender shall require only notice of willingness to exchange the
security for the amount specified.
(3) Any notice may be given by service as in civil actions or by
certified mail addressed to the last known address of the person liable.
(b)(1) Any person who purchases a security in violation of Section
48-2-121(a) ( the seller not knowing of the violation of Section 48-2-121(a),
and who does not carry the burden of proof of showing that he did not know
and in the exercise of reasonable care could not have known of the violation
of Section 48-2-121(a)) shall be liable to the person selling the security to
the purchaser to return the security, plus any income received by the
purchaser thereon, upon tender of the consideration received, or, if the
purchaser no longer owns the security, the excess of the value of the
security when the purchaser disposed of it, plus interest at the legal rate
from the date of disposition, over the consideration paid for the security.
(2) Tender requires only notice of willingness to pay the amount
specified in exchange for the security.
(3) Any notice may be given by service as in civil actions or by
certified mail to the last known address of the person liable.
(c)(1) Any person who willfully engages in any act or conduct which
violates Section 48-2-121 shall be liable to any other person (not knowing
that any such conduct constituted a violation of Section 48-2-121) who
purchases or sells any security at a price which was affected by the act or
conduct for the damages sustained as a result of such act or conduct unless
the person sued shall prove that the person sued acted in good faith and did
not know, and in the exercise of reasonable care could not have known, that
such act or conduct violated Section 48-2-121.
(2) Damages shall be the difference between the price at which the
other person purchased or sold securities and the market value which the
securities would have had at the time of the other person's purchase or sale
in the absence of the act or conduct plus interest at the legal rate.
(d) Any person who shall make or cause to be made any statement in
any application, report, or document filed pursuant to this part or any rule
or order hereunder or any undertaking contained in a registration statement
hereunder, or in any advice given in such person's capacity as an investment
adviser, which statement was at the time and in the light of the
circumstances under which it was made false or misleading with respect to any
material fact shall be liable to any person (not knowing that any such
statement was false or misleading) who, in reliance upon such statement,
shall have purchased or sold a security at a price which was affected by such
statement, for damages (calculated as provided in subsections (a) and (b))
caused by such reliance, unless the person sued shall prove that the person
sued acted in god faith and had no knowledge that such statement was false or
misleading and in the exercise of reasonable care could not have known that
such statement was false or misleading.
(e) A person seeking to enforce any liability under this section may
sue either at law or in equity in any court of competent jurisdiction.
(f) In any such suit under this section, the court may, in its
discretion, require an undertaking for the payment of the costs of such suit,
and assess reasonable cost, including reasonable attorneys' fees, against
either party litigant.
(g) Every person who directly or indirectly controls a person liable
under this section, every partner, principal executive officer, or director
of such person, every person occupying a similar status or performing similar
functions, every employee of such person who materially aids in the act or
transaction constituting the violation, and every broker-dealer or agent who
materially aids in the act or transaction constituting the violation, are
also liable jointly and severally with and to the same extent as such person,
unless the person who would be liable under subsection (d) proves that the
person who would be liable did not know, and in the exercise of reasonable
care could not have known, of the existence of the facts by reason of which
the liability is alleged to exist. There is contribution as in cases of
contract among the several persons so liable.
(h) No action shall be maintained under this section unless
commenced before the expiration of two (2) years after the act or transaction
constituting the violation or the expiration of one (1) year after the
discovery of the facts constituting the violation, or after such discovery
should have been made by the exercise of reasonable diligence, whichever
first expires.
(i) Any condition, stipulation or provision binding any person
acquiring any security to waive compliance with any provision of this part or
any rule or order hereunder is void.
(j) The rights and remedies under this part are in addition to any
other rights or remedies that may exist at law or in equity.
(k) The legal rate of interest shall be that as provided by Section
47-14-121.
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TEXAS SECURITIES ACT OF 1957
SECTION 7. PERMIT OR REGISTRATION FOR ISSUE BY COMMISSIONER;
INFORMATION FOR ISSUANCE OF PERMIT OR REGISTRATION.
A. Qualification of Securities.
(1) No dealer, agent or salesman shall sell or offer for sale any
securities issued after September 6, 1955, except those which shall have been
registered by Notification under subsection B or by Coordination under
subsection C of this Section 7 and except those which come within the classes
enumerated in Section 5 or Section 6 of this Act, until the issuer of such
securities or a dealer registered under the provisions of this Act shall have
been granted a permit by the Commissioner; and no such permit shall be
granted by the Commissioner until the issuer of such securities or a dealer
registered under the provisions of this Act shall have filed with the
Commissioner a sworn statement verified under the oath of an executive
officer or partner of the issuer, or of such registered dealer, and attested
by the secretary or partner thereof, setting forth the following information:
a. The names, residences and post office addresses of the officers
and directors of the company;
b. The location of its principal office and of all branch offices in
this State, if any;
c. A copy of its articles of incorporation or partnership or
association, as the case may be, and of any amendments thereto, if any; if a
corporation, a copy of all minutes of any proceedings of its directors,
stockholders or members relating to or affecting the issue of said security;
if a corporation, a copy of its bylaws and of any amendments thereto; if a
trustee, a copy of all instruments by which the trust is created and in which
it is accepted, acknowledged or declared;
d. A statement showing the amount of capital stock, if any, and if
no capital stock, the amount of capital of the issuer that is contemplated to
be employed; the number of shares into which such stock is divided, or if not
divided into shares of stock, what division is to be made or is contemplated;
the par value of each share, or if no par stock, the price at which such
security is proposed to be sold; the promotional fees or commissions to be
paid for the sale of same, including any and all compensations of every
nature that are in any way to be allowed the promoters or allowed for the
sale of same; and how such compensation is to be paid, whether in cash,
securities, service or otherwise, or partly of either or both; also, the
amount of cash to be paid, or securities to be issued, given, transferred or
sold to promoters for promotion or organization services and expenses, and
the amount of promotion or organization services and expenses which will be
assumed or in any way paid by the issuer;
e. Copies of certificates of the stock and all other securities to
be sold, or offered for sale, together with application blanks therefor; a
copy of any contract it proposes to make concerning such security; a copy of
any prospectus or advertisement or other description of security prepared by
or for it for distribution or publication;
f.
1. A detailed statement prepared in accordance with generally
accepted auditing standards and procedures and generally accepted accounting
principles, showing all the assets and all the liabilities of the issuer,
said statement to reflect the financial condition of the issuer on a day not
more than ninety (90) days prior to the date such statement is filed. Such
statement shall list all assets in detail and shall show how the value of
such assets was determined, that is, whether the value set forth in said
statement represents the actual cost in money of such assets, or whether such
value represents their present market value, or some other value than the
actual cost in money, and shall show the present actual value of said assets;
also, whether the value set forth in the statement is greater or less than
the actual cost value in money and greater or less than the present market
value of such assets. If any of the assets consist of real estate, then said
statement shall show the amount for which said real estate is rendered for
State and county taxes, or assessed for taxes. If any such assets listed
shall consist of anything other than cash and real estate, same shall be set
out in detail so as to give the Commissioner the fullest possible information
concerning same, and the Commissioner shall have the power to require the
filing of such additional information as the Commissioner may deem necessary
to determine whether or not the true value of said assets are reflected in
the statement filed. Should any of the assets listed in said statement be
subject to any repurchase agreement, or any other agreement of like
character, by the terms of which the absolute ownership of, or title to said
assets is qualified or limited in any way, then the terms and conditions of
said agreement by which the absolute ownership of, or title to said assets is
qualified or limited, as well as the amount and character of the assets
subject thereto shall be fully stated. Said statement shall list all current
liabilities, that is, all liabilities which will mature and become due within
one year from the date of such application, and shall list separately from
such current liabilities, all other liabilities, contingent or otherwise,
showing the amount of those which are secured by mortgage or otherwise, the
assets of the issuer which are subject to such mortgage, and the dates of
maturity of any such mortgage indebtedness. Such application shall also
include a detailed income statement, prepared in accordance with generally
accepted auditing standards and procedures and generally accepted accounting
principles, which shall cover the last three (3) years' operations of the
issuer, if such issuer has been in operation for three (3) years, but if not,
said income statement shall
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cover the time that said issuer has been operating. If said issuer has not
been operating, but is taking over a concern of any kind which has been
previously operating, an income statement showing the operations of the
concern thus taken over for a period of the last three (3) years next
preceding the taking over of said concern shall be included in said
statement; said income statement shall clearly reflect the amount of net
income or net loss incurred during each of the years shown.
2. The financial statements required in subparagraph (1) of this
paragraph for a small business issuer, as defined by Board rule, may be
reviewed by an independent certified public accountant in accordance with the
Statements on Standards for Accounting and Review Services promulgated by the
American Institute of Certified Public Accountants in lieu of being audited
and certified, provided that the small business issuer otherwise meets all of
the requirements that the Board by rule, regulation, or order may prescribe,
conditionally or unconditionally.
SECTION 33. CIVIL LIABILITIES.
A. Liability of Sellers.
(1) Registration and Related Violations. A person who offers or
sells a security in violation of Section 7, 9 (or a requirement of the
Commissioner thereunder), 12, 23B, or an order under 23A of this Act is
liable to the person buying the security from him, who may sue either at law
or in equity for rescission or for damages if the buyer no longer owns the
security.
(2) Untruth or Omission. A person who offers or sells a security
(whether or not the security or transaction is exempt under Section 5 or 6 of
this Act) by means of an untrue statement of a material fact or an omission
to state a material fact necessary in order to make the statements made, in
the light of the circumstances under which they are made, not misleading, is
liable to the person buying the security from him, who may sue either at law
or in equity for rescission, or for damages if the buyer no longer owns the
security. However, a person is not liable if he sustains the burden of proof
that either (a) the buyer knew of the untruth or omission or (b) he (the
offeror or seller) did not know, and in the exercise of reasonable care could
not have known, of the untruth or omission. The issuer of the security (other
than a government issuer identified in Section 5M) is not entitled to the
defense in clause (b) with respect to an untruth or omission (i) in a
prospectus required in connection with a registration statement under Section
7A, 7B, or 7C, or (ii) in a writing prepared and delivered by the issuer in
the sale of a security.
B. Liability of Buyers. A person who offers to buy or buys a
security (whether or not the security or transaction is exempt under Section
5 or 6 of this Act) by means of an untrue statement of a material fact or an
omission to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they are made, not
misleading, is liable to the person selling the security to him, who may sue
either at law or in equity for rescission or for damages if the buyer no
longer owns the security. However, a person is not liable if he sustains the
burden of proof that either (a) the seller knew of the untruth or omission,
or (b) he (the offeror or buyer) did not know, and in the exercise of
reasonable care could not have known, of the untruth or omission.
C. Liability of Nonselling Issuers Which Register.
(1) This Section 33C applies only to an issuer which registers under
Section 7A, 7B, or 7C of this Act, or under Section 6 of the U.S. Securities
Act of 1933, its outstanding securities for offer and sale by or for the
owner of the securities. (2) If the prospectus required in connection with
the registration contains, as of its effective date, an untrue statement of a
material fact or an omission to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they
are made, not misleading, the issuer is liable to a person buying the
registered security, who may sue either at law or in equity for rescission or
for damages if the buyer no longer owns the securities. However, an issuer is
not liable if it sustains the burden of proof that the buyer knew of the
untruth or omission.
D. Rescission and Damages. For this Section 33:
(1) On rescission, a buyer shall recover (a) the consideration he
paid for the security plus interest thereon at the legal rate from the date
of payment by him, less (b) the amount of any income he received on the
security, upon tender of the security (or a security of the same class and
series).
(2) On rescission, a seller shall recover the security (or a
security of the same class and series) upon tender of (a) the consideration
he received for the security plus interest thereon at the legal rate from the
date of receipt by him, less (b) the amount of any income the buyer received
on the security.
(3) In damages, a buyer shall recover (a) the consideration he paid
for the security plus interest thereon at the legal rate from the date of
payment by him, less (b) the value of the security at the time he disposed of
it plus the amount of any income he received on the security.
(4) In damages, a seller shall recover (a) the value of the security
at the time of sale plus the amount of any income the buyer received on the
security, less (b) the consideration paid the seller for the security plus
interest thereon at the legal rate from the date of payment to the seller.
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(5) For a buyer suing under Section 33C, the consideration he paid
shall be deemed the lesser of (a) the price he paid and (b) the price at
which the security was offered to the public.
(6) On rescission or as a part of damages, a buyer or a seller shall
also recover costs.
(7) On rescission or as a part of damages, a buyer or a seller may
also recover reasonable attorney's fees if the court finds that the recovery
would be equitable in the circumstances.
E. Time of Tender. Any tender specified in Section 33D may be made
at any time before entry of judgment.
F. Liability of Control Persons and Aiders.
(1) A person who directly or indirectly controls a seller, buyer, or
issuer of a security is liable under Section 33A, 33B, or 33C jointly and
severally with the seller, buyer, or issuer, and to the same extent as if he
were the seller, buyer, or issuer, unless the controlling person sustains the
burden of proof that he did not know, and in the exercise of reasonable care
could not have known, of the existence of the facts by reason of which the
liability is alleged to exist.
(2) A person who directly or indirectly with intent to deceive or
defraud or with reckless disregard for the truth or the law materially aids a
seller, buyer, or issuer of a security is liable under Section 33A, 33B, or
33C jointly and severally with the seller, buyer, or issuer, and to the same
extent as if he were the seller, buyer, or issuer.
(3) There is contribution as in cases of contract among the several
persons so liable.
G. Survivability of Actions. Every cause of action under this Act
survives the death of any person who might have been a plaintiff or defendant.
H. Statute of Limitations.
(1) No person may sue under Section 33A(1) or 33F so far as it
relates to Section 33A(1):
(a) more than three years after the sale; or
(b) if he received a rescission offer (meeting the requirements of
Section 33I) before suit unless he (i) rejected the offer in writing within
30 days of its receipt and (ii) expressly reserved in the rejection his right
to sue; or
(c) more than one year after he so rejected a rescission offer
meeting the requirements of Section 33I.
(2) No person may sue under Section 33A(2), 33C, or 33F so far as it
relates to 33A(2) or 33C:
(a) more than three years after discovery of the untruth or
omission, or after discovery should have been made by the exercise of
reasonable diligence; or
(b) more than five years after the sale; or
(c) if he received a rescission offer (meeting the requirements of
Section 33I) before suit, unless he (i) rejected the offer in writing within
30 days of its receipt, and (ii) expressly reserved in the rejection his
right to sue; or
(d) more than one year after he so rejected a rescission offer
meeting the requirements of Section 33I.
(3) No person may sue under Section 33B or 33F so far as it relates
to Section 33B:
(a) more than three years after discovery of the untruth or
omission, or after discovery should have been made by the exercise of
reasonable diligence; or
(b) more than five years after the purchase; or
(c) if he received a rescission offer (meeting the requirements of
Section 33J) before suit unless he (i) rejected the offer in writing within
30 days of its receipt, and (ii) expressly reserved in the rejection his
right to sue; or
(d) more than one year after he so rejected a rescission offer
meeting the requirements of Section 33J.
I. Requirements of a Rescission Offer to Buyers. A rescission offer
under Section 33H(1) or (2) shall meet the following requirements:
(1) The offer shall include financial and other information material
to the offeree's decision whether to accept the offer, and shall not contain
an untrue statement of a material fact or an omission to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading.
(2) The offeror shall deposit funds in escrow in a state or national
bank doing business in Texas (or in another bank approved by the
commissioner) or receive an unqualified commitment from such a bank to
furnish funds sufficient to pay the amount offered.
(3) The amount of the offer to a buyer who still owns the security
shall be the amount (excluding costs and attorney's fees) he would recover on
rescission under Section 33D(1).
(4) The amount of the offer to a buyer who no longer owns the
security shall be the amount (excluding costs and attorney's fees) he would
recover in damages under Section 33D(3).
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(5) The offer shall state:
(a) the amount of the offer, as determined pursuant to Paragraph (3)
or (4) above, which shall be given (i) so far as practicable in terms of a
specified number of dollars and a specified rate of interest for a period
starting at a specified date, and (ii) so far as necessary, in terms of
specified elements (such as the value of the security when it was disposed of
by the offeree) known to the offeree but not to the offeror, which are
subject to the furnishing of reasonable evidence by the offeree.
(b) the name and address of the bank where the amount of the offer
will be paid.
(c) that the offeree will receive the amount of the offer within a
specified number of days (not more than 30) after receipt by the bank, in
form reasonably acceptable to the offeror, and in compliance with the
instructions in the offer, of:
(i) the security, if the offeree still owns it, or evidence of the
fact and date of disposition if he no longer owns it; and
(ii) evidence, if necessary, of elements referred to in Paragraph
(a)(ii) above.
(d) conspicuously that the offeree may not sue on his purchase under
Section 33 unless:
(i) he accepts the offer but does not receive the amount of the
offer, in which case he may sue within the time allowed by Section 33H(1)(a)
or 33H(2)(a) or (b), as applicable; or
(ii) he rejects the offer in writing within 30 days of its receipt
and expressly reserves in the rejection his right to sue, in which case he
may sue within one year after he so rejects.
(e) in reasonable detail, the nature of the violation of this Act
that occurred or may have occurred.
(f) any other information the offeror wants to include.
J. Requirements of a Rescission Offer to Sellers. A rescission offer
under Section 33H(3) shall meet the following requirements:
(1) The offer shall include financial and other information material
to the offeree's decision whether to accept the offer, and shall not contain
an untrue statement of a material fact or an omission to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading.
(2) The offeror shall deposit the securities in escrow in a state or
national bank doing business in Texas (or in another bank approved by the
commissioner).
(3) The terms of the offer shall be the same (excluding costs and
attorney's fees) as the seller would recover on rescission under Section
33D(2).
(4) The offer shall state:
(a) the terms of the offer, as determined pursuant to Paragraph (3)
above, which shall be given (i) so far as practicable in terms of a specified
number and kind of securities and a specified rate of interest for a period
starting at a specified date, and (ii) so far as necessary, in terms of
specified elements known to the offeree but not the offeror, which are
subject to the furnishing of reasonable evidence by the offeree.
(b) the name and address of the bank where the terms of the offer
will be carried out.
(c) that the offeree will receive the securities within a specified
number of days (not more than 30) after receipt by the bank, in form
reasonably acceptable to the offeror, and in compliance with the instructions
in the offer, of:
(i) the amount required by the terms of the offer; and
(ii) evidence, if necessary, of elements referred to in Paragraph
(a)(ii) above.
(d) conspicuously that the offeree may not sue on his sale under
Section 33 unless:
(i) he accepts the offer but does not receive the securities, in
which case he may sue within the time allowed by Section 33H(3)(a) or (b), as
applicable; or
(ii) he rejects the offer in writing within 30 days of its receipt
and expressly reserves in the rejection his right to sue, in which case he
may sue within one year after he so rejects.
(e) in reasonable detail, the nature of the violation of this Act
that occurred or may have occurred.
(f) any other information the offeror wants to include.
K. Unenforceability of Illegal Contracts. No person who has made or
engaged in the performance of any contract in violation of any provision of
this Act or any rule or order or requirement hereunder, or who has acquired
any purported right under any such contract with knowledge of the facts by
reason of which its making or performance was in violation, may base any suit
on the contract.
L. Waivers Void. A condition, stipulation, or provision binding a buyer
or seller of a security to waive compliance with a provision of this Act or a
rule or order or requirement hereunder is void.
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M. Saving of Existing Remedies. The rights and remedies provided by
this Act are in addition to any other rights (including exemplary or punitive
damages) or remedies that may exist at law or in equity.
N. Limitation of Liability in Small Business Issuances.
(1) For purposes of this Section 33N, unless the context otherwise
requires, "small business issuer" means an issuer of securities that, at the
time of an offer to which this Section 33N applies:
(a) has annual gross revenues in an amount that does not exceed $25
million; and
(b) does not have a class of equity securities registered, or
required to be registered, with the Securities and Exchange Commission under
Section 12 of the Securities Exchange Act of 1934, as amended (15 U.S.C.
Section 78l).
(2) This Section 33N applies only to:
(a) an offer of securities made by a small business issuer or by the
seller of securities of a small business issuer that is in an aggregate
amount that does not exceed $5 million; and
(b) a person who has been engaged to provide services relating to an
offer of securities described by Section 33N(2)(a), including an attorney, an
accountant, a consultant, or the firm of the attorney, accountant, or
consultant.
(3) The maximum amount that may be recovered against a person to
which this Section 33N applies in any action or series of actions under
Section 33 relating to an offer of securities to which this Section 33N
applies is an amount equal to three times the fee paid by the issuer or other
seller to the person for the services related to the offer of securities,
unless the trier of fact finds the person engaged in intentional wrongdoing
in providing the services.
(4) A small business issuer making an offer of securities shall
provide to the prospective buyer a written disclosure of the limitation of
liability created by this Section 33N and shall receive a signed
acknowledgment that the disclosure was provided.
UTAH UNIFORM SECURITIES ACT
SECTION 61-1-7. REGISTRATION BEFORE SALE.
It is unlawful for any person to offer or sell any security in this
state unless it is registered under this chapter, the security or transaction
is exempted under Section 61-1-14, or the security is a federal covered
security for which a notice filing has been made pursuant to the provisions
of Section 61-1-15.5.
SECTION 61-1-22. SALES AND PURCHASES IN VIOLATION; REMEDIES;
LIMITATION OF ACTIONS.
(1)(a) A person who offers or sells a security in violation of
Subsection 61-1-3(1), Section 61-1-7, Subsection 61-1-17(2), any rule or
order under Section 61-1-15, which requires the affirmative approval of sales
literature before it is used, any condition imposed under Subsection
61-1-10(4) or 61-1-11(7), or offers, sells, or purchases a security in
violation of Subsection 61-1-1(2) is liable to the person selling the
security to or buying the security from him, who may sue either at law or in
equity to recover the consideration paid for the security, together with
interest at 12% per year from the date of payment, costs, and reasonable
attorney's fees, less the amount of any income received on the security, upon
the tender of the security or for damages if he no longer owns the security.
(b) Damages are the amount that would be recoverable upon a tender
less the value of the security when the buyer disposed of it and interest at
12% per year from the date of disposition.
(2) The court in a suit brought under Subsection (1) may award an
amount equal to three times the consideration paid for the security, together
with interest, costs, and attorney's fees, less any amounts, all as specified
in Subsection (1) upon a showing that the violation was reckless or
intentional.
(3) A person who offers or sells a security in violation of
Subsection 61-1-1(2) is not liable under Subsection (1)(a) if the purchaser
knew of the untruth or omission, or the seller did not know and in the
exercise of reasonable care could not have known of the untrue statement or
misleading omission.
(4)(a) Every person who directly or indirectly controls a seller or
buyer liable under Subsection (1), every partner, officer, or director of
such a seller or buyer, every person occupying a similar status or performing
similar functions, every employee of such a seller or buyer who materially
aids in the sale or purchase, and every broker-dealer or agent who materially
aids in the sale are also liable jointly and severally with and to the same
extent as the seller or purchaser, unless the nonseller or nonpurchaser who
is so liable sustains the burden of proof that he did not know, and in
exercise of reasonable care could not have known, of the existence of the
facts by reason of which the liability is alleged to exist.
(b) There is contribution as in cases of contract among the several
persons so liable.
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(5) Any tender specified in this section may be made at any time
before entry of judgment.
(6) A cause of action under this section survives the death of any
person who might have been a plaintiff or defendant.
(7)(a) No action shall be maintained to enforce any liability under
this section unless brought before the expiration of four years after the act
or transaction constituting the violation or the expiration of two years
after the discovery by the plaintiff of the facts constituting the violation,
whichever expires first.
(b) No person may sue under this section if:
(i) the buyer or seller received a written offer, before suit and at
a time when he owned the security, to refund the consideration paid together
with interest at 12% per year from the date of payment, less the amount of
any income received on the security, and he failed to accept the offer within
30 days of its receipt; or
(ii) the buyer or seller received such an offer before suit and at a
time when he did not own the security, unless he rejected the offer in
writing within 30 days of its receipt.
(8) No person who has made or engaged in the performance of any
contract in violation of this chapter or any rule or order hereunder, or who
has acquired any purported right under any such contract with knowledge of
the facts by reason of which its making or performance was in violation, may
base any suit on the contract.
(9) A condition, stipulation, or provision binding a person
acquiring a security to waive compliance with this chapter or a rule or order
hereunder is void.
(10)(a) The rights and remedies provided by this chapter are in
addition to any other rights or remedies that may exist at law or in equity.
(b) This chapter does not create any cause of action not specified
in this section or Subsection 61-1-4(6).
VERMONT SECURITIES ACT
SECTION 4205. REGISTRATION AND NOTICE FILING OF SECURITIES.
No securities except those exempted under section 4203a of this
title, those sold in any transaction exempt under section 4204a of this
title, or those that are federal covered securities may be offered for sale
or sold within this state unless such securities shall have been registered
by notification or by qualification as defined in this chapter. Registration
of stock shall be deemed to include the registration of rights to subscribe
to such stock if the notice under section 4207 of this title or the
application under section 4208 of this title for registration of such stock
includes a statement that such rights are to be issued.
SECTION 4240. CIVIL LIABILITY.
(a) Any person who offers or sells a security in violation of
sections 4205, 4213, 4224a or 4234 of this title, or any rule of the
commissioner relating to those sections is liable to the person purchasing
the security from that person. The purchaser of the security may sue to
recover the consideration paid for the security, together with interest at
the legal rate from the date of payment, costs and reasonable attorneys' fees
less the amount of any income received on the security, upon the tender of
the security, or for damages plus costs and reasonable attorneys' fees if the
purchaser no longer owns the security. Damages are the amount that would be
recoverable upon a tender less the value of the security when the purchaser
disposed of it and interest at the legal rate from the date of disposition.
Tender shall require only notice of willingness to exchange the security for
the amount specified.
(b) A person who offers or sells a security in violation of
subsection 4224a(a) is not liable under this subsection if the purchaser knew
of the untrue statement of a material fact or omission of a statement of a
material fact; or the seller sustains the burden of proof to establish that
the seller did not know and in the exercise of reasonable care could not have
known of the untrue statement or omission.
(c) Any person who purchases a security in violation of subsection
4224a(a) is liable to the person selling the security to that person. The
seller of the security may sue to recover the security, plus any income
received by the purchaser on the security upon tender of the consideration
received, costs and reasonable attorneys' fees, or for damages plus costs and
reasonable attorneys' fees if the purchaser no longer owns the security.
Damages are the excess of the value of the security when the purchaser
acquired it, plus interest at the legal rate on that amount from the date of
disposition, over the consideration paid for the security plus any income
received on the security. Tender requires only notice of willingness to pay
the amount specified in exchange for the security.
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(d) A person who purchases a security in violation of subsection
4224a(a) is not liable under this subsection if the seller knew of the untrue
statement of a material fact or omission of a statement of a material fact;
or the purchaser sustains the burden of proof to establish that the purchaser
did not know and in the exercise of reasonable care could not have known of
the untrue statement or omission.
(e)(1) A person who engages in the business of advising other
persons, for compensation, either directly or through publications or
writings, as to the value of securities or as to the advisability of
investing in, purchasing, or selling securities, or who, for compensation and
as a part of a regular business, issues or promulgates analyses or reports
concerning securities in violation of subsections 4213(f), (g), (h) or (i) of
this title, subsections 4224a(e), (f), (g), or (i) of this title, or section
4234 of this title is liable to such other persons, who may sue to recover
the consideration paid for such advice and any loss due to such advice,
together with interest at the legal rate from the date of payment of the
consideration plus costs and reasonable attorney's fees, less the amount of
any income received from such advice.
(2) A person who receives directly or indirectly any consideration
from another person for advice as to the value of securities or their
purchase or sale, whether through the issuance of analyses, reports, or
otherwise and employs any device, scheme, or artifice to defraud such other
person or engages in any act, practice, or course of business which operates
or would operate as a fraud or deceit on such other person, is liable to such
other person, who may sue to recover the consideration paid for such advice
and any loss due to such advice, together with interest at the legal rate
from the date of payment of the consideration plus costs and reasonable
attorney's fees, less the amount of any income received from such advice.
(f) Every person who directly or indirectly controls another person
liable under subsection (a), (c) or (e) of this section, every partner,
officer or director of that other person, every member in a member-managed
limited liability company, every manager in a manager-managed limited
liability company, and every member in a manager-managed limited liability
company who materially aids in the act or transaction constituting the
violation, every person occupying a similar status or performing similar
functions, every employee of that other person who materially aids in the act
or transaction constituting the violation and every broker-dealer or sales
representative who materially aids in the act or transaction constituting the
violation is also liable jointly and severally with and to the same extent as
that other person, unless the person otherwise secondarily liable under this
chapter proves that the person did not know, and in the exercise of
reasonable care could not have known, of the existence of the facts by reason
of which the liability is alleged to exist. There is contribution as in cases
of contract among the several persons so liable.
(g) An action under this section shall be brought within three years
after the act, omission or transaction constituting the violation, or within
two years after the violation is or reasonably should have been discovered,
whichever occurs later, but not later than six years after the act, omission
or transaction constituting the violation.
(h) No person subject to this chapter who has made or engaged in the
performance of any contract in violation of sections 4205, 4213, 4224a or
4234 of this chapter or any rule or order of the commissioner, or who has
acquired any purported right under any contract with knowledge of the facts
by reason of which its making or performance was in violation, may base any
suit on the contract.
(i) The rights and remedies provided by this chapter are in addition
to any other rights or remedies that may exist at law or in equity.
(j) Every cause of action under this chapter survives the death of
any person who might have been a plaintiff or defendant.
VIRGINIA SECURITIES ACT
SECTION 13.1-507. REGISTRATION REQUIREMENT; EXEMPTIONS.
It shall be unlawful for any person to offer or sell any security
unless (i) the security is registered under this chapter, (ii) the security
or transaction is exempted by this chapter, or (iii) the security is a
federal covered security. Notwithstanding the provisions of subdivision
(iii), for the period ending three years from October 11, 1996, the
Commission may require the registration of a federal covered security issued
by any issuer who refuses to pay a fee required by this chapter or rule
promulgated pursuant to this chapter; provided, that a delay in payment or an
underpayment of a fee that is remedied within fifteen days after receipt of
notice from the Commission shall not constitute a refusal to pay the fee.
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SECTION 13.1-522. CIVIL LIABILITIES.
A. Any person who: (i) sells a security in violation of Section
13.1-502, 13.1-504A, 13.1-507(i) or (ii), 13.1-510(e) or (f), or (ii) sells a
security by means of an untrue statement of a material fact or any omission
to state a material fact necessary in order to make the statement made, in
the light of the circumstances under which they were made, not misleading
(the purchaser not knowing of such untruth or omission), and who shall not
sustain the burden of proof that he did not know, and in the exercise of
reasonable care could not have known, of such untruth or omission, shall be
liable to the person purchasing such security from him who may sue either at
law or in equity to recover the consideration paid for such security,
together with interest thereon at the annual rate of six percent, costs, and
reasonable attorneys' fees, less the amount of any income received on the
security, upon the tender of such security, or for the substantial equivalent
in damages if he no longer owns the security.
B. Any person who (i) engages in the business of advising others,
for compensation, either directly or through publications or writings, as to
the value of securities or as to the advisability of investing in,
purchasing, or selling securities, or who, for compensation and as a part of
a regular business, issues or promulgates analyses or reports concerning
securities in willful and material violation of Section 13.1-503, subsection
A of Section 13.1-504, or of any rule or order under Section 13.1-505.1, or
(ii) receives, directly or indirectly, any consideration from another person
for advice as to the value of securities or their purchase or sale, whether
through the issuance of analyses, reports or otherwise and employs any
device, scheme, or artifice to defraud such other person or engages in any
act, practice or course of business which operates or would operate as a
fraud or deceit on such other person, shall be liable to that person who may
sue either at law or in equity to recover the consideration paid for such
advice and any loss due to such advice, together with interest thereon at the
annual rate of six percent from the date of payment of the consideration plus
costs and reasonable attorney's fees, less the amount of any income received
from such advice and any other economic advantage.
C. Every person who directly or indirectly controls a person liable
under subsection A or B of this section, including every partner, officer, or
director of such a person, every person occupying a similar status or
performing similar functions, every employee of such a person who materially
aids in the conduct giving rise to the liability, and every broker-dealer,
investment advisor, investment advisor representative or agent who materially
aids in such conduct shall be liable jointly and severally with and to the
same extent as such person, unless able to sustain the burden of proof that
he did not know, and in the exercise of reasonable care could not have known,
of the existence of the facts by reason of which the liability is alleged to
exist. There shall be contribution as in cases of contract among the several
persons so liable.
D. No suit shall be maintained to enforce any liability created
under this section unless brought within two years after the transaction upon
which it is based; provided, that, if any person liable by reason of
subsection A, B or C of this section makes a written offer, before suit is
brought, to refund the consideration paid and any loss due to any investment
advice provided by such person, together with interest thereon at the annual
rate of six percent, less the amount of any income received on the security
or resulting from such advice, or to pay damages if the purchaser no longer
owns the security, no purchaser or user of the investment advisory service
shall maintain a suit under this section who has refused or failed to accept
such offer within thirty days of its receipt.
E. Any tender specified in this section may be made at any time
before entry of judgment.
F. Any condition, stipulation or provision binding any person
acquiring any security or receiving any investment advice to waive compliance
with any provision of this chapter or of any rule or order thereunder shall
be void.
G. The rights and remedies provided by this chapter shall be in
addition to any and all other rights and remedies that may exist at law or in
equity.
THE SECURITIES ACT OF WASHINGTON
SECTION 21.20.140. UNLAWFUL TO OFFER OR SELL UNREGISTERED SECURITIES;
EXCEPTIONS.
It is unlawful for any person to offer or sell any security in this
state unless: (1) The security is registered by coordination or qualification
under this chapter; (2) the security or transaction is exempted under RCW
21.20.310 or 21.20.320; or (3) the security is a federal covered security,
and, if required, the filing is made and a fee is paid in accordance with RCW
21.20.327.
B-49
<PAGE>
SECTION 21.20.430. CIVIL LIABILITIES; SURVIVAL, LIMITATION OF ACTIONS;
WAIVER OF CHAPTER VOID; SCIENTER.
(1) Any person, who offers or sells a security in violation of any
provisions of RCW 21.20.010, 21.20.140(1) or (2), or 21.20.180 through
21.20.230, is liable to the person buying the security from him or her, who
may sue either at law or in equity to recover the consideration paid for the
security, together with interest at eight percent per annum from the date of
payment, costs, and reasonable attorneys' fees, less the amount of any income
received on the security, upon the tender of the security, or for damages if
he or she no longer owns the security. Damages are the amount that would be
recoverable upon a tender less (a) the value of the security when the buyer
disposed of it and (b) interest at eight percent per annum from the date of
disposition.
(2) Any person who buys a security in violation of the provisions of
RCW 21.20.010 is liable to the person selling the security to him or her, who
may sue either at law or in equity to recover the security, together with any
income received on the security, upon tender of the consideration received,
costs, and reasonable attorneys' fees, or if the security cannot be
recovered, for damages. Damages are the value of the security when the buyer
disposed of it, and any income received on the security, less the
consideration received for the security, plus interest at eight percent per
annum from the date of disposition, costs, and reasonable attorneys' fees.
(3) Every person who directly or indirectly controls a seller or
buyer liable under subsection (1) or (2) above, every partner, officer,
director or person who occupies a similar status or performs a similar
function of such seller or buyer, every employee of such a seller or buyer
who materially aids in the transaction, and every broker-dealer, salesperson,
or person exempt under the provisions of RCW 21.20.040 who materially aids in
the transaction is also liable jointly and severally with and to the same
extent as the seller or buyer, unless such person sustains the burden of
proof that he or she did not know, and in the exercise of reasonable care
could not have known, of the existence of the facts by reason of which the
liability is alleged to exist. There is contribution as in cases of contract
among the several persons so liable.
(4)(a) Every cause of action under this statute survives the death
of any person who might have been a plaintiff or defendant.
(b) No person may sue under this section more than three years after
the contract of sale for any violation of the provisions of RCW 21.20.140(1)
or (2) or 21.20.180 through 21.20.230, or more than three years after a
violation of the provisions of RCW 21.20.010, either was discovered by such
person or would have been discovered by him or her in the exercise of
reasonable care. No person may sue under this section if the buyer or seller
receives a written rescission offer, which has been passed upon by the
director before suit and at a time when he or she owned the security, to
refund the consideration paid together with interest at eight percent per
annum from the date of payment, less the amount of any income received on the
security in the case of a buyer, or plus the amount of income received on the
security in the case of a seller.
(5) No person who has made or engaged in the performance of any
contract in violation of any provision of this chapter or any rule or order
hereunder, or who has acquired any purported right under any such contract
with knowledge of the facts by reason of which its making or performance was
in violation, may base any suit on the contract. Any condition, stipulation,
or provision binding any person acquiring any security to waive compliance
with any provision of this chapter or any rule or order hereunder is void.
(6) Any tender specified in this section may be made at any time
before entry of judgment.
(7) Notwithstanding subsections (1) through (6) of this section, if
an initial offer or sale of securities that are exempt from registration
under RCW 21.20.310 is made by this state or its agencies, political
subdivisions, municipal or quasi-municipal corporations, or other
instrumentality of one or more of the foregoing and is in violation of RCW
21.20.010(2), and any such issuer, member of the governing body, committee
member, public officer, director, employee, or agent of such issuer acting on
its behalf, or person in control of such issuer, member of the governing
body, committee member, public officer, director, employee, or agent of such
person acting on its behalf, materially aids in the offer or sale, such
person is liable to the purchaser of the security only if the purchaser
establishes scienter on the part of the defendant. The word "employee" or the
word "agent," as such words are used in this subsection, do not include a
bond counsel or an underwriter. Under no circumstances whatsoever shall this
subsection be applied to require purchasers to establish scienter on the part
of bond counsels or underwriters. The provisions of this subsection are
retroactive and apply to any action commenced but not final before July 27,
1985. In addition, the provisions of this subsection apply to any action
commenced on or after July 27, 1985.
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<PAGE>
WISCONSIN UNIFORM SECURITIES LAW
SECTION 551.21. REGISTRATION REQUIREMENT.
(1) It is unlawful for any person to offer or sell any security in
this state unless at least one of the following conditions is met:
(a) The security is registered under this chapter.
(b) The security or transaction is exempted under s. 551.22 or 551.23.
(c) The security is a federal covered security.
(2) It is unlawful for any issuer or registrant of any securities
registered under this chapter, or any person in control of or controlled by
or under common control with the issuer or registrant, to offer or sell any
of the registered securities in this state if the issuer or registrant is in
violation of this chapter, or any rule under this chapter, or any order under
this chapter of which he or she has notice, or if the registration statement
relating to the securities, as of the date of such offer or sale, is
incomplete in any material respect or contains any statement which is false
or misleading with respect to any material fact.
SECTION 551.59. CIVIL LIABILITIES.
(1)(a) Any person who offers or sells a security in violation of
s.551.21, 551.31, 551.41 or 551.55 or any rule relating thereto, or any
condition imposed under s. 551.26 or 551.27 or any order under this chapter
of which the person has notice is liable to the person purchasing the
security from him or her. The person purchasing the security may sue either
at law or in equity to recover the consideration paid for the security,
together with interest at the legal rate under s. 138.04 from the date of
payment, and reasonable attorney fees, less the amount of any income received
on the security, upon the tender of the security, or for damages if the
person no longer owns the security. Damages are the amount that would be
recoverable upon a tender less the value of the security when the purchaser
disposed of it and interest at the legal rate under s. 138.04 from the date
of disposition. Tender shall require only notice of willingness to exchange
the security for the amount specified. Any notice may be given by service as
in civil actions or by certified mail addressed to the last-known address of
the person liable.
(1)(b) A person who offers or sells a security in violation of s.
551.41(2) is not liable under par. (a) if the purchaser knew of the untrue
statement of a material fact or omission of a statement of a material fact or
the person sustains the burden of proof to establish that he or she did not
know and in the exercise of reasonable care could not have known of the
untrue statement or omission.
(2)(a) Any person who purchases a security in violation of s.
551.41(2) is liable to the person selling the security to him or her, who may
sue either at law or in equity to recover the security and reasonable
attorney fees, plus any income received by the purchaser thereon, upon tender
of the consideration received, or for damages and reasonable attorney fees if
the purchaser no longer owns the security. Damages are the excess of the
value of the security when the purchaser disposed of it, plus interest at the
legal rate under s. 138.04 from the date of disposition, over the
consideration paid for the security. Tender requires only notice of
willingness to pay the amount specified in exchange for the security. Any
notice may be given by service as in civil actions or by certified mail to
the last-known address of the person liable.
(2)(b) A person who purchases a security in violation of s. 551.41(2)
is not liable under par. (a) if the seller knew of the untrue statement of a
material fact or omission of a statement of a material fact or the person
sustains the burden of proof to establish that he or she did not know and in
the exercise of reasonable care could not have known of the untrue statement
or omission.
(3) Any person who wilfully participates in any act or transaction in
violation of s. 551.42 shall be liable to any other person who purchases or
sells any security at a price which was affected by the act or transaction
for the damages sustained as a result of such act or transaction. Damages
shall be the difference between the price at which the other person purchased
or sold securities and the market value which the securities would have had
at the time of his or her purchase or sale in the absence of the act or
transaction, plus interest at the legal rate under s. 138.04 and reasonable
attorney fees.
(4) Every person who directly or indirectly controls a person liable
under sub. (1), (2) or (3), every partner, principal executive officer or
director of such person, every person occupying a similar status or
performing similar functions, every employee of such person who materially
aids in the act or transaction constituting the violation, and every
broker-dealer or agent who materially aids in the act or transaction
constituting the violation, are also liable jointly and severally with and to
the same extent as such person, unless the person liable hereunder proves
that he or she did not know, and in the exercise of reasonable care could not
have known, of the existence of the facts by reason of which the liability is
alleged to exist. There is contribution as in cases of contract among the
several persons so liable.
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<PAGE>
(5) No action shall be maintained under this section unless commenced
before the expiration of 3 years after the act or transaction constituting
the violation, but the time specified for commencing such action shall be
extended by reason of any fact and for the time specified in ss. 893.13 and
893.16 to 893.23.
(6)(a) No purchaser may commence an action under this section if,
before suit is commenced, the purchaser has received a written offer stating
the respect in which liability under this section may have arisen and fairly
advising the purchaser of his or her rights; offering to repurchase the
security for cash payable on delivery of the security equal to the
consideration paid, together with interest at the legal rate under s. 138.04
from the date of payment, less the amount of any income received thereon or,
if the purchaser no longer owns the security, offering to pay the purchaser
upon acceptance of the offer an amount in cash equal to the damages computed
in accordance with sub. (1); and stating that the offer may be accepted by
the purchaser at any time within a specified period of not less than 30 days
after the date of receipt thereof or such shorter period as the division may
by rule prescribe; and the purchaser has failed to accept such offer in
writing within the specified period.
(b) No seller may commence an action under this section if, before
suit is commenced, the seller has received a written offer stating the
respect in which liability under this section may have arisen and fairly
advising the seller of his or her rights; offering to return the security
plus the amount of any income received thereon upon payment of the
consideration received, or, if the purchaser no longer owns the security,
offering to pay the seller upon acceptance of the offer an amount in cash
equal to the damages computed in accordance with sub. (2); and providing that
the offer may be accepted by the seller at any time within a specified period
of not less than 30 days after the date of receipt thereof; and the seller
has failed to accept the offer in writing within the specified period.
(c) Offers shall be in the form and contain the information the
division by rule prescribes. Every offer under this subsection shall be
delivered to the offeree or sent by certified mail addressed to the offeree
at the offeree's last-known address. If an offer is not performed in
accordance with its terms, suit by the offeree under this section shall be
permitted without regard to this subsection.
(7) No person who has made or engaged in the performance of any
contract in violation of this chapter or any rule or order hereunder, or who
has acquired any purported right under any contract with knowledge of the
facts by reason of which its making or performance was in violation, may base
any suit on the contract.
(8) Any condition, stipulation or provision binding any person
acquiring any security to waive compliance with any provision of this chapter
or any rule or order hereunder is void.
(9) The rights and remedies under this chapter are in addition to any
other rights or remedies that may exist at law or in equity.
B-52
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALES PERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OFFERED HEREBY, OR AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO OR FROM ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
<TABLE>
<S> <C>
PROSPECTUS SUMMARY.....................................................4
RISK FACTORS...........................................................8
RESCISSION OFFER......................................................16
USE OF PROCEEDS.......................................................30
DIVIDEND POLICY.......................................................30
CAPITALIZATION........................................................31
SELECTED FINANCIAL INFORMATION........................................34
BUSINESS..............................................................35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................45
MANAGEMENT............................................................52
PRINCIPAL SHAREHOLDERS................................................63
DESCRIPTION OF CAPITAL STOCK..........................................63
PLAN OF DISTRIBUTION AND SELLING
SHAREHOLDERS.....................................................67
SHARES ELIGIBLE FOR FUTURE SALE.......................................70
LEGAL MATTERS.........................................................70
EXPERTS...............................................................70
ADDITIONAL INFORMATION................................................71
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.....................................................F-1
EXHIBIT A RESCISSION ELECTION FORM...................................A-1
EXHIBIT B INDEX TO EXCERPTS FROM STATE
SECURITIES LAWS......................................................B-1
</TABLE>
UNTIL , 1999 (90 DAYS FROM THE TRANSACTIONS IN THE REGISTERED
SECURITIES), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS.
CYNET, INC.
RESCISSION OFFER
- -------------------------------------------------------------------------------
CLASS A COMMON STOCK
CLASS B COMMON STOCK
SERIES A PREFERRED STOCK
SERIES B PREFERRED STOCK
WARRANTS TO PURCHASE
CLASS A COMMON STOCK
PROSPECTUS
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
1. Article 2.02A of the TBCA provides, in relevant part, as follows:
Subject to the provisions of Sections B and C of this Article,
each corporation shall have power:
(16) to indemnify directors, officers, employees, and agents
of the corporation and to purchase and maintain liability
insurance for those persons.
2. Article Twelve of the Articles of Incorporation of the Company (therein
referred to as the "Corporation") provides as follows: "The Corporation
shall indemnify all current and former directors and officers of the
Corporation to the fullest extent of the applicable law, including,
without limitation, Article 2.02-1 of the Texas Business Corporation
Act."
3. The Corporation may purchase and maintain insurance, at its expense, on
behalf of any indemnitee against any liability asserted against him and
incurred by him in such a capacity or arising out of his status as a
representative of the Corporation, whether or not the Corporation would
have the power to indemnify such person against such expense, liability
or loss under the TBCA.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant.
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 6,321
NASD Filing Fee........................................................... --
Legal Fees and Expenses................................................... 200,000
Accounting Fees and Expenses.............................................. 175,000
Blue Sky Fees and Expenses (including counsel fees)....................... 40,000
---------
Federal Taxes............................................................. --
State Taxes and Fees...................................................... --
Printing and Engraving Expenses........................................... 45,000
---------
Transfer Agent and Registrar Fees and Expenses............................ 7,500
---------
Expenses by Selling Shareholders.......................................... --
Miscellaneous.............................................................
---------
Total............................................................ $
---------
---------
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
TRANSACTIONS SUBJECT TO RESCISSION OFFER
1. From August 1996 through December 1996, the Company issued (i) an
aggregate of 956,280 shares of Class A Common Stock to 124 individuals
at a purchase price of $1.00 per share and (ii) 43,720 shares of Class
A Common Stock to Keith Shaffner for services rendered valued at
$43,720 in connection with the offering. Mr. Shaffner directed the
Company to issue 42,375 of such shares to nine other individuals. At
the time of the offering, the Company believed that such transactions
were exempt from registration under the Securities Act pursuant to
Section 3(b) thereof as an exempt offering under Rule 504 of Regulation
D promulgated thereunder.
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<PAGE>
However, subsequent events have led the Company to believe that such
transactions were not exempt from registration under Regulation D under
the Securities Act.
2. From October 1996 through December 1997, the Company issued an
aggregate of (i) 3,397,854 shares of Series A Preferred Stock to 355
individuals at a purchase price of $2.00 per share and (ii) 70,000
shares of Series A Preferred Stock to two individuals at a purchase
price of $1.43 per share. Subsequent to their issuance, 3,364,354
shares of the Series A Preferred Stock converted into 4,036,724 shares
of Class A Common Stock (1 to 1.2 ratio) prior to January 1, 1998,
leaving 103,500 shares of Series A Preferred Stock outstanding. At the
time of the offering, the Company believed such individuals were
sophisticated investors and received adequate information concerning an
investment in the Company. As a result, the Company believed the
transaction was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not
involving a public offering. However, because subsequent events have
led the Company to believe that at the time of the offering such
individuals were not sophisticated investors or did not receive
adequate information in connection with their investment in the
Company, the Company believes the transaction was not exempt from
registration under Section 4(2) of the Securities Act.
3. From March 1997 through November 1997, the Company issued an aggregate
of 1,798,574 shares of Series B Preferred Stock to 324 individuals at a
purchase price of $3.00 per share. Subsequently, the Company
repurchased 18,041 shares of Class B Common Stock (following the
conversion of 15,034 shares of Series B Preferred Stock at a 1.2
conversion ratio) from certain individuals at a purchase price of $2.50
per share (equivalent to $3.00 per share of Series B Preferred Stock).
Subsequent to their issuance, 1,691,225 shares of Series B Preferred
Stock converted into 2,029,470 shares of Class B Common Stock prior to
March 31, 1998, leaving 87,349 shares of Series B Preferred Stock
outstanding of which 77,349 shares are subject to rescission. At the
time of the offering, the Company believed such individuals were
sophisticated investors and received adequate information concerning an
investment in the Company. As a result, the Company believed the
transaction was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not
involving a public offering. However, because subsequent events have
led the Company to believe that at the time of the offering such
individuals were not sophisticated investors or did not receive
adequate information in connection with their investment in the
Company, the Company believes the transaction was not exempt from
registration under Section 4(2) of the Securities Act.
4. From October 1996 through April 1997, the Company issued an aggregate
of 272,000 shares of Class A Common Stock to 28 individuals at a
purchase price of $1.00 per share. At the time of the offering, the
Company believed such individuals were sophisticated investors and
received adequate information concerning an investment in the Company.
As a result, the Company believed the transaction was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof
as a transaction by an issuer not involving a public offering. However,
because subsequent events have led the Company to believe that at the
time of the offering such individuals were not sophisticated investors
or did not receive adequate information in connection with their
investment in the Company, the Company believes the transaction was not
exempt from registration under Section 4(2) of the Securities Act.
5. In July 1996, the Company issued Cliff Crutchfield 50,000 shares of
Class A Common Stock as compensation for services rendered valued at
$50,000. At the time of the offering, the Company believed Mr.
Crutchfield was a sophisticated investor and received adequate
information concerning an investment in the Company. As a result, the
Company believed the transaction was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof as a transaction by an
issuer not involving a public offering. However, because subsequent
events have led the Company to believe that at the time of the offering
Mr. Crutchfield was not a sophisticated investor or did not receive
adequate information in connection with his investment in the Company,
the Company believes the transaction was not exempt from registration
under Section 4(2) of the Securities Act.
6. In October 1996, the Company issued Boyd Jenkins 5,000 shares of Class
A Common Stock for services rendered valued at $5,000. At the time of
the offering, the Company believed Mr. Jenkins was a sophisticated
investor and received adequate information concerning an investment in
the Company. As a result, the Company believed the transaction was
exempt from registration under the Securities Act pursuant to Section
4(2) thereof as a transaction by an issuer not involving a public
offering. However, because subsequent events have led the Company to
believe that at the time of the offering Mr. Jenkins was not a
sophisticated investor or did not receive
II-2
<PAGE>
adequate information in connection with his investment in the Company,
the Company believes the transaction was not exempt from registration
under Section 4(2) of the Securities Act.
7. In November 1996, the Company issued five-year warrants to 23
individuals entitling such individuals to purchase an aggregate of
738,000 shares of Class A Common Stock at an exercise price of $1.00
per share for services rendered valued at $191,880. At the time of the
offering, the Company believed such individuals were sophisticated
investors and received adequate information concerning an investment in
the Company. As a result, the Company believed the transaction was
exempt from registration under the Securities Act pursuant to Section
4(2) thereof as a transaction by an issuer not involving a public
offering. However, because subsequent events have led the Company to
believe that at the time of the offering such individuals were not
sophisticated investors or did not receive adequate information in
connection with their investment in the Company, the Company believes
the transaction was not exempt from registration under Section 4(2) of
the Securities Act.
8. In April 1997, the Company issued Antoni Albaut 100,000 shares of Class
B Common Stock for services rendered valued at $100,000. At the time of
the offering, the Company believed Mr. Albaut was a sophisticated
investor and received adequate information concerning an investment in
the Company. As a result, the Company believed the transaction was
exempt from registration under the Securities Act pursuant to Section
4(2) thereof as a transaction by an issuer not involving a public
offering. However, because subsequent events have led the Company to
believe that at the time of the offering Mr. Albaut was not a
sophisticated investor or did not receive adequate information in
connection with his investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
9. In April 1997, the Company issued a three-year warrant to Dennis
Eagleeye entitling Mr. Eagleeye to purchase 61,000 shares of Class A
Common Stock at an exercise price of $1.00 per share for services
rendered at minimal value. At the time of the offering, the Company
believed Mr. Eagleeye was a sophisticated investor and received
adequate information concerning an investment in the Company. As a
result, the Company believed the transaction was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof
as a transaction by an issuer not involving a public offering. However,
because subsequent events have led the Company to believe that at the
time of the offering Mr. Eagleeye was not a sophisticated investor or
did not receive adequate information in connection with his investment
in the Company, the Company believes the transaction was not exempt
from registration under Section 4(2) of the Securities Act.
10. In April 1997, the Company issued John Berg 400,000 shares of Class B
Common Stock in exchange for the conversion of a promissory note in the
amount of $100,000 payable to Mr. Berg. At the time of the offering,
the Company believed Mr. Berg was a sophisticated investor and received
adequate information concerning an investment in the Company. As a
result, the Company believed the transaction was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof
as a transaction by an issuer not involving a public offering. However,
because subsequent events have led the Company to believe that at the
time of the offering Mr. Berg was not a sophisticated investor or did
not receive adequate information in connection with his investment in
the Company, the Company believes the transaction was not exempt from
registration under Section 4(2) of the Securities Act.
11. In May 1997, the Company issued Joe Flores 25,000 shares of Class B
Common Stock at a purchase price of $2.00 per share. At the time of the
offering, the Company believed Mr. Flores was a sophisticated investor
and received adequate information concerning an investment in the
Company. As a result, the Company believed the transaction was exempt
from registration under the Securities Act pursuant to Section 4(2)
thereof as a transaction by an issuer not involving a public offering.
However, because subsequent events have led the Company to believe that
at the time of the offering Mr. Flores was not a sophisticated investor
or did not receive adequate information in connection with his
investment in the Company, the Company believes the transaction was not
exempt from registration under Section 4(2) of the Securities Act.
12. In May 1997, the Company issued Alex Najoan 1,267 shares of Class A
Common Stock in exchange for furniture and fixtures valued at $1,267.
At the time of the offering, the Company believed Mr. Najoan was a
sophisticated investor and received adequate information concerning an
investment in the Company. As a result, the Company believed the
transaction was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not
involving a public offering. However, because subsequent events have
led the
II-3
<PAGE>
Company to believe that at the time of the offering Mr. Najoan was not
a sophisticated investor or did not receive adequate information in
connection with his investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
13. In July 1997, the Company issued Boyd Jenkins 15,000 shares of Class A
Common Stock at a purchase price of $2.00 per share. At the time of the
offering, the Company believed Mr. Jenkins was a sophisticated investor
and received adequate information concerning an investment in the
Company. As a result, the Company believed the transaction was exempt
from registration under the Securities Act pursuant to Section 4(2)
thereof as a transaction by an issuer not involving a public offering.
However, because subsequent events have led the Company to believe that
at the time of the offering Mr. Jenkins was not a sophisticated
investor or did not receive adequate information in connection with his
investment in the Company, the Company believes the transaction was not
exempt from registration under Section 4(2) of the Securities Act.
14. In October 1997, the Company issued five individuals an aggregate of
14,500 shares of Class A Common Stock at a purchase price of $2.00 per
share. At the time of the offering, the Company believed such
individuals were sophisticated investors and received adequate
information concerning an investment in the Company. As a result, the
Company believed the transaction was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof as a transaction by an
issuer not involving a public offering. However, because subsequent
events have led the Company to believe that at the time of the offering
such individuals were not sophisticated investors or did not receive
adequate information in connection with their investment in the
Company, the Company believes the transaction was not exempt from
registration under Section 4(2) of the Securities Act.
15. In December 1997, the Company issued Robert Horner 110,000 shares of
Class A Common Stock for services rendered valued at $42,900. At the
time of the offering, the Company believed Mr. Horner was a
sophisticated investor and received adequate information concerning an
investment in the Company. As a result, the Company believed the
transaction was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not
involving a public offering. However, because subsequent events have
led the Company to believe that at the time of the offering Mr. Horner
was not a sophisticated investor or did not receive adequate
information in connection with his investment in the Company, the
Company believes the transaction was not exempt from registration under
Section 4(2) of the Securities Act.
16. In February 1998, the Company issued Elmer Krause 10,000 shares of
Class A Common Stock at a purchase price of $2.00 per share. At the
time of the offering, the Company believed Mr. Krause was a
sophisticated investor and received adequate information concerning an
investment in the Company. As a result, the Company believed the
transaction was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof as a transaction by an issuer not
involving a public offering. However, because subsequent events have
led the Company to believe that at the time of the offering Mr. Krause
was not a sophisticated investor or did not receive adequate
information in connection with his investment in the Company, the
Company believes the transaction was not exempt from registration under
Section 4(2) of the Securities Act.
17. In February 1998, the Company issued Valori Schoberg 3,333 shares of
Series B Preferred Stock at a purchase price of $3.00 per share
pursuant to claims by Ms. Schoberg that the Company had agreed to issue
such shares on such terms in 1997. At the time of the offering, the
Company believed Ms. Schoberg was a sophisticated investor and received
adequate information concerning an investment in the Company. As a
result, the Company believed the transaction was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof
as a transaction by an issuer not involving a public offering. However,
because subsequent events have led the Company to believe that at the
time of the offering Ms. Schoberg was not a sophisticated investor or
did not receive adequate information in connection with his investment
in the Company, the Company believes the transaction was not exempt
from registration under Section 4(2) of the Securities Act.
18. In April 1998, the Company issued Michael R. Smith 3,333 shares of
Series B Preferred Stock at a purchase price for $3.00 per share
pursuant to claims by Mr. Smith that the Company had agreed to issue
such shares on such terms in 1997. At the time of the offering, the
Company believed Mr. Smith was a sophisticated investor and received
adequate information concerning an investment in the Company. As a
result, the Company believed the transaction was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof
as a transaction by an issuer not involving a public offering. However,
because subsequent events have led the
II-4
<PAGE>
Company to believe that at the time of the offering Mr. Smith was not a
sophisticated investor or did not receive adequate information in
connection with his investment in the Company, the Company believes the
transaction was not exempt from registration under Section 4(2) of the
Securities Act.
19. In May 1998, the Company issued six limited partnerships an aggregate
of 154,000 shares of Class B Common Stock. These shares were issued in
satisfaction of certain claims by these partnerships that they were
entitled to receive such shares in exchange for providing services
valued at $60,000 to the Company during 1997. At the time of the
offering, the Company believed such partnerships were sophisticated
investors and received adequate information concerning an investment in
the Company. As a result, the Company believed the transaction was
exempt from registration under the Securities Act pursuant to Section
4(2) thereof as a transaction by an issuer not involving a public
offering. However, because subsequent events have led the Company to
believe that at the time of the offering such partnerships were not
sophisticated investors or did not receive adequate information in
connection with their investment in the Company, the Company believes
the transaction was not exempt from registration under Section 4(2) of
the Securities Act.
TRANSACTIONS NOT SUBJECT TO RESCISSION OFFER:
1. In May 1995, the Company issued an aggregate of 1,000,000 shares of
Class A Common Stock which were issued to various trusts and a
partnership related to Ray C. Davis, the founder of the Company, for
$1,000. At the time of the offering, the Company believed such trusts
and partnership were sophisticated investors and received adequate
information concerning an investment in the Company. As a result, the
Company believes the transaction was exempt from registration pursuant
to Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
2. In August 1995, the Company issued an aggregate of 9,000,000 shares of
Class A Common Stock to various trusts and a partnership related to the
founder of the Company after giving effect to a 9 for 1 share dividend.
At the time of the offering, the Company believed such trusts and
partnership were sophisticated investors and received adequate
information concerning an investment in the Company. As a result, the
Company believes the transaction was exempt from registration pursuant
to Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
3. Between May 1996 and July 1996, the Company issued Vickroy Stone an
aggregate of 500,000 shares of Class A Common Stock for services
rendered valued at $500,000. In February 1997, the Company repurchased
450,000 of such shares of Class A Common Stock from Mr. Stone at a
purchase price of $1.00 per share. In February 1997, Mr. Stone sold the
remaining 50,000 shares of Class A Common Stock to a partnership
related to Ray C. Davis, the founder of the Company, for $1.00 per
share.
4. In July 1996, the Company issued an aggregate of 1,050,000 of Class A
Common Stock to the principals of International Fax Corporation ("IFC")
and IMedia, S.A. of France ("IMedia") in connection with (i) an
agreement granting the Company a right of first refusal to acquire all
of the outstanding capital stock of IMedia, (ii) the right to utilize
IMedia's European network of fax broadcasting equipment and (iii) the
agreement of IMedia to use the Company's network for fax broadcast
traffic to the United States. The shares of Class A Common Stock were
valued by the Company at $1.00 per share. In connection with this
transaction, Mr. Davis caused the Davis Interests to sell Jean-David
Benichou, a principal of IFC and IMedia, 250,000 shares of Class A
Common Stock at a price of $1.00 per share. Subsequent to this series
of transactions, the Company wrote off the value of its investment.
5. In May, 1997, the Company issued a five-year warrant to Vickroy Stone
entitling Mr. Stone to purchase an aggregate of 450,000 shares of Class
A Common Stock at an exercise price of $2.00 per share. Inasmuch as the
exercise price of these warrants exceeded the fair market value of the
underlying Class A Common Stock, the Company determined that this
warrant had no value at the date of issuance. At the time of the
offering, the Company believed Mr. Stone was a sophisticated investor
and received adequate information concerning an investment in the
Company. As a result, the Company believes the transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
II-5
<PAGE>
6. In July 1997, the Company issued Sam McKinley 400,000 shares of Class B
Common Stock in payment of a loan commitment fee. The Company
determined that it received no value in exchange for such shares. At
the time of the offering, the Company believed Mr. McKinley was a
sophisticated investor and received adequate information concerning an
investment in the Company. As a result, the Company believes the
transaction was exempt from registration pursuant to Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering.
7. In December 1997, the Company issued 2,328,940 shares of its Class A
Common Stock to 125 individuals in exchange for their net equity
interest ("Minority Interest") in certain affiliated limited liability
companies ("LLCs"). In January 1998, the Company issued an additional
92,640 shares of its Class A Common Stock to Sam McKinley incident to
the acquisition of Mr. McKinley's proportionate share of the Minority
Interest. At the time of the offering, the Company believed such
individuals were sophisticated investors and received adequate
information concerning an investment in the Company. As a result, the
Company believes the transaction was exempt from registration pursuant
to Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
8. On November 14, 1997, the Company entered into a Settlement Agreement
and Mutual Release with Keith Shaffner for services rendered by him
during 1996 and 1997. In exchange for a complete release of all claims
by Mr. Shaffner and his affiliate, CyFax, Inc. ("CyFax"), against the
Company, the Company issued to Mr. Shaffner: (i) a warrant entitling
Mr. Shaffner to purchase 1,150,000 shares of Class B Common Stock at a
price of $1.00 per share, exercisable on or before August 30, 1999
(which the Company has agreed to extend until November 4, 2001), (ii) a
warrant entitling Mr. Shaffner to purchase 1,050,000 shares of Class B
Common Stock at a price of $1.00 per share, exercisable on or before
February 28, 2000 (which the Company has agreed to extend until
November 4, 2001), (iii) 500,000 shares of Class A Common Stock and
(iv) $51,000 in cash. In addition, the Company issued 200,000 shares of
Class A Common Stock to CyFax for the termination of an exclusive agent
management agreement with the Company. During 1996 and 1997, the
Company paid Mr. Shaffner, individually, an aggregate of $202,951 for
services rendered and CyFax an aggregate of $893,527 for services
rendered. At the time of the offering, the Company believed Mr.
Shaffner was a sophisticated investor and received adequate information
concerning an investment in the Company. As a result, the Company
believes the transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
9. In April 1998, the Company issued a five-year warrant entitling Ray
Davis to purchase an aggregate of 2,000,000 shares of Class A Common
Stock at an exercise price of $1.00 per share pursuant to Mr. Davis'
employment agreement with the Company. At the time of the offering, the
Company believed Mr. Davis was a sophisticated investor and received
adequate information concerning an investment in the Company. As a
result, the Company believes the transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
10. In May 1998, the Company issued five-year warrants entitling certain
individuals and entities to purchase an aggregate of 350,954 shares of
Class B Common Stock at prices of $1.00 and $2.00 per share. Inasmuch
as the exercise prices of these warrants exceeded the fair market value
of the underlying Class B Common Stock, the Company determined that the
warrants had no value at the date of issuance.
11. In July 1998 the Company entered into a Subscription Agreement with
Cynet Holdings, LLC ("Cynet Holdings"), pursuant to which Cynet
Holdings is committed to purchase up to 10,000,000 shares of Class A
Common Stock of the Company for $1.00 per share prior to December 31,
1998. The Subscription Agreement was subsequently amended to extend the
duration of the agreement to December 31, 1999. As of August 31, 1999,
Cynet Holdings has purchased an aggregate of 4,106,000 shares of Class
A Common Stock pursuant to the Subscription Agreement. Also pursuant to
the Subscription Agreement, the Company (i) issued a five-year warrant
entitling Cynet Holdings to purchase an aggregate of 4,800,000 shares
of Class A Common Stock at a price of $1.00 per share and (ii) entered
into a registration rights agreement granting Cynet Holdings certain
demand and piggy- back registration rights covering the Company's
securities held by Cynet Holdings. At the time of the offering, the
Company believed Cynet Holdings was a sophisticated investor and
received adequate information concerning an investment in the Company.
As a result, the Company believes the transaction was exempt from
II-6
<PAGE>
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
12. In September 1999, the Company agreed to issue a warrant entitling
Michael Silvert to purchase 100,000 shares of Class B Common Stock at a
price of $1.00 per share. This warrant will be issued upon the
completion of the Rescission Offer in satisfaction of certain claims by
Mr. Silvert that he was entitled to receive such warrant in exchange
for providing services to the Company during 1997. At the time Mr.
Silvert performed such services in 1997, the Company believed Mr.
Silvert was a sophisticated investor and received adequate information
concerning an investment in the Company. As a result, the Company
believes the transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
ITEM 27. EXHIBITS.
(a)
<TABLE>
<S> <C>
+1 Form of Underwriting Agreement
*3.1 Articles of Incorporation of the Company, as amended.
*3.2 Bylaws of the Company.
4.1 Form of Certificate Representing Class A Common Stock.
4.2 Form of Certificate Representing Class B Common Stock.
4.3 Form of Certificate Representing Series A Preferred Stock.
4.4 Form of Certificate Representing Series B Preferred Stock.
*4.5 Amended and Restated Certificate of Designation, Preferences, Rights
and Limitations of Convertible Non-voting Series A Preferred Stock.
*4.6 Certificate of Designation, Preferences, Rights and Limitations of
Convertible Non-voting Series B Preferred Stock.
+5.1 Opinion of Chamberlain, Hrdlicka, White, Williams & Martin.
*10.1 Employment Agreement dated as of March 3, 1997, between the Company and
Ray C. Davis.
*10.2 Assignment of Intellectual Property dated as of March 3, 1997, between
the Company and Ray C. Davis.
*10.3 Consulting Agreement dated as of June 17, 1997, between the Company and
Vincent W. Beale, Sr.
*10.4 Settlement Agreement and Mutual Release dated as of November 14, 1997,
among the Company, Keith Shaffner and CyFax, Inc.
*10.5 1997 Restated Stock Option Plan.
*10.6 Employment Agreement dated as of February 1, 1998, between the Company
and Vincent W. Beale, Sr.
*10.7 Employment Agreement dated as of March 1, 1998, between the Company and
David R. Hearon, Jr.
*10.8 Employment Agreement dated as of April 13, 1998, between the Company
and Ray C. Davis.
*10.9 Warrant dated April 13, 1998 issued to Ray C. Davis.
*10.10 Employment Agreement dated as of July 22, 1998, between the Company and
Bernard B. Beale.
*10.11 Employment Agreement dated as of July 22, 1998, between the Company and
Samuel C. Beale.
*10.12 Subscription Agreement dated as of July 22, 1998, between the Company
and Cynet Holdings, LLC.
*10.13 Registration Rights Agreement dated as of July 22, 1998, between the
Company and Cynet Holdings, LLC.
*10.14 Warrant dated July 22, 1998 issued to Cynet Holdings, LLC.
*10.15 Form of Assignment Agreement between the Company and the members of the
LLCs.
*10.16 Letter Agreement dated June 26, 1996, between the Company, Ray Davis
and International Fax Corporation.
II-7
<PAGE>
*10.17 Supplement dated October 30,1997, to the Letter Agreement dated June
26, 1996, between the Company, Ray Davis and International Fax
Corporation.
*10.18 Employment Agreement dated as of August 26, 1998, between the Company
and R. Greg Smith.
10.19 Settlement Agreement and Mutual Release in Full dated as of August 31,
1998, between the Company and Ray C. Davis.
*10.20 First Amendment to Subscription Agreement dated July 31, 1999 between
the Company and Cynet Holdings, LLC.
*10.21 Purchase and Sale Agreement as of July 31, 1999 between the Company and
Cynet Holdings, LLC.
10.22 Strategic Alliance Agreement dated August 9, 1999 between the Company
and IXC Communications Services, Inc.
10.23 Letter of December 15, 1998 from the Company to Brooktrout Technology,
Inc.
10.24 Joint Sales and Support Agreement dated January 21, 1999 between the
Company and Telesystems Marketing, Inc.
*21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP
+23.2 Consent of Chamberlain, Hrdlicka, White, Williams & Martin (included in
Exhibit 5.1).
27.1 Financial Data Schedule.
</TABLE>
- --------------------------
* Previously filed.
+ To be filed by amendment.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
i. To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
and
iii. To include any additional or changed material
information with respect to the plan of distribution.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-8
<PAGE>
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
4. That, for the purpose of determining liability under the
Securities Act of 1933:
i. The information omitted from the form of prospectus
filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4), or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this
registration statement as of the time it was declared
effective.
ii. Each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering
thereof.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas, on the 16th day of September, 1999.
CYNET, INC.
By: /S/ VINCENT W. BEALE, SR.
---------------------------------------------
Vincent W. Beale, Sr., Chairman of the Board
and Chief Executive Officer
Each individual whose signature appears below constitutes and appoints
Vincent W. Beale, Sr., Samuel C. Beale and R. Greg Smith and each of them,
his true and lawful attorneys-in-fact and agents with full power and
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sell any and all amendments (including
post-effective amendments) to this Registration Statement and any subsequent
registration statements filed by the Registrant pursuant to Rule 462(b) of
the Securities Act of 1933, which relates to this Registration Statement, and
to file same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisition and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or his or their substitutes, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ Vincent W. Beale, Sr.. Chairman of the Board of Directors September 16, 1999
- ------------------------------------ and Chief Executive Officer
Vincent W. Beale, Sr. (Principal Executive Officer)
/S/ R. Greg Smith Chief Financial Officer September 16, 1999
- ------------------------------------ (Principal Financial and Accounting Officer)
R. Greg Smith
/S/ Wayne Schroeder Director September 16, 1999
- ------------------------------------
Wayne Schroeder
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --- ----------------------
<S> <C>
+1 Form of Underwriting Agreement
*3.1 Articles of Incorporation of the Company, as amended.
*3.2 Bylaws of the Company.
4.1 Form of Certificate Representing Class A Common Stock.
4.2 Form of Certificate Representing Class B Common Stock.
4.3 Form of Certificate Representing Series A Preferred Stock.
4.4 Form of Certificate Representing Series B Preferred Stock.
*4.5 Certificate of Designation, Preferences, Rights and Limitations of
Convertible Non-voting Series A Preferred Stock.
*4.6 Certificate of Designation, Preferences, Rights and Limitations of
Convertible Non-voting Series B Preferred Stock.
+5.1 Opinion of Chamberlain, Hrdlicka, White, Williams & Martin.
*10.1 Employment Agreement dated as of March 3, 1997, between the Company and
Ray C. Davis.
*10.2 Assignment of Intellectual Property dated as of March 3, 1997, between
the Company and Ray C. Davis.
*10.3 Consulting Agreement dated as of June 17, 1997, between the Company and
Vincent W. Beale, Sr.
*10.4 Settlement Agreement and Mutual Release dated as of November 14, 1997,
among the Company, Keith Shaffner and CyFax, Inc.
*10.5 1997 Stock Option Plan.
*10.6 Employment Agreement dated as of February 1, 1998, between the Company
and Vincent W. Beale, Sr.
*10.7 Employment Agreement dated as of March 1, 1998, between the Company and
David R. Hearon, Jr.
*10.8 Employment Agreement dated as of April 13, 1998, between the Company
and Ray C. Davis.
*10.9 Warrant dated April 13, 1998 issued to Ray C. Davis.
*10.10 Employment Agreement dated as of July 22, 1998, between the Company and
Bernard B. Beale.
*10.11 Employment Agreement dated as of July 22, 1998, between the Company and
Samuel C. Beale.
*10.12 Subscription Agreement dated as of July 22, 1998, between the Company
and Cynet Holdings, LLC.
*10.13 Registration Rights Agreement dated as of July 22, 1998, between the
Company and Cynet Holdings, LLC.
*10.14 Warrant dated July 22, 1998 issued to Cynet Holdings, LLC.
*10.15 Form of Assignment Agreement between the Company and the members of the
LLCs.
*10.16 Letter Agreement dated June 26, 1996, between the Company, Ray Davis
and International Fax Corporation.
*10.17 Supplement dated October 30,1997, to the Letter Agreement dated June
26, 1996, between the Company, Ray Davis and International Fax
Corporation.
*10.18 Employment Agreement dated as of August 26, 1998, between the Company
and R. Greg Smith.
10.19 Settlement Agreement and Mutual Release in Full dated October 28, 1998,
between the Company and Ray C. Davis.
*10.20 First Amendment to Subscription Agreement dated July 31, 1999 between
the Company and Cynet Holdings, LLC.
*10.21 Purchase and Sale Agreement as of July 31, 1999 between the Company and
Cynet Holdings, LLC.
10.22 Strategic Alliance Agreement dated August 9, 1999 between the Company
and IXC Communications Services, Inc.
10.23 Letter of December 15, 1998 from the Company to Brooktrout Technology,
Inc.
10.24 Joint Sales and Support Agreement dated January 21, 1999 between the
Company and Telesystems Marketing, Inc.
*21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP
+23.2 Consent of Chamberlain, Hrdlicka, White, Williams & Martin (included in
Exhibit 5.1).
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* Previously filed.
+ To be filed by amendment.
<PAGE>
<TABLE>
<S> <C>
No. CYNET, INC. Shares
COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS CUSIP 23257K 10 7
THIS CERTIFICATE IN TRANSFERABLE IN CHICAGO, IL. SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE NO PAR VALUE CLASS A VOTING COMMON STOCK OF CYNET, INC., a corporation
organized in the State of Texas, transferable on the books of the Corporation by the holder hereof, in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed. This certificate and the shares represented hereby
are issued and shall be held subject to all of the provisions of the Articles of Incorporation of the Corporation, as
amended, and the Bylaws of the Corporation, as amended, copies of which are on file at the principal office of the
Corporation, to all of which the holder of this certificate assents by acceptance hereof. This certificate is not valid
unless countersigned by the Transfer Agent and registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by its duly authorized officers and its
corporate seal to be hereto affixed.
Dated:
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
___________________________________________________ TRANSFER AGENT
AUTHORIZED SIGNATURE AND REGISTRAR
[SEAL] ________________________________________________ ____________________________________________
Secretary President
</TABLE>
<PAGE>
CYNET, INC.
STATEMENT REGARDING AUTHORIZED SHARES OF MORE THAN ONE CLASS AND NOTICE OF
DENIAL OF PREEMPTIVE RIGHTS.
Full statements of the designation, preferences, limitations and relative
rights of the shares of each class of authorized stock of the Corporation, the
variations in the relative rights and preferences of the shares of any series of
Preferred Stock so far as the same have been fixed and determined, and the
authority of the Board of Directors to fix and determine the relative rights and
preferences of each series thereof, and of the denial of the preemptive rights
of shareholders to acquire unissued or treasury shares of the Corporation, are
set forth in the Articles of Incorporation of the Corporation, as amended, which
are on file in the Office of the Secretary of the State of Texas, copies of
which may be obtained, without charge on written request to the Corporation at
its principal place of business or registered office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable law or regulation:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common.
<TABLE>
<S><C>
UNIF GIFT MIN ACT - ________________________________________ Custodian ___________________________________________
(Cust) (Minor)
Under Uniform Gifts to Minors Act_______________________________
(State)
UNIF TRF MIN ACT - _________________________________ Custodian (until age __) ____________________________________
(Cust) (Minor)
Under Uniform Transfer to Minor Act ____________________________
(State)
Additional abbreviations may also be used though not in above list.
For value received, _______________________________ hereby sell, assign and transfer unto
</TABLE>
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
___________________________ shares of the capital stock represented by the
within Certificate, and do hereby irrevocably constitute and appoint
____________________ Attorney to transfer the said stock on the books of the
within named Corporation with full power of substitution in the premises.
Dated ____________________________
NOTICE:
<TABLE>
<S><C>
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST X___________________________________________________
CORRESPOND WITH THE NAME(S) AS WRITTEN ON (SIGNATURE)
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER. X___________________________________________________
(SIGNATURE)
----------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM.)
----------------------------------------------------
SIGNATURE(S) GUARANTEED BY:
</TABLE>
<PAGE>
<TABLE>
<S> <C>
No. CYNET, INC. Shares
COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS CUSIP 23257K 20 6
THIS CERTIFICATE IN TRANSFERABLE IN CHICAGO, IL. SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE NO PAR VALUE CLASS B NON-VOTING COMMON STOCK OF CYNET, INC., a
corporation organized in the State of Texas, transferable on the books of the Corporation by the holder hereof, in person or
by duly authorized attorney upon surrender of this Certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be held subject to all of the provisions of the Articles of Incorporation of the
Corporation, as amended, and the Bylaws of the Corporation, as amended, copies of which are on file at the principal office
of the Corporation, to all of which the holder of this certificate assents by acceptance hereof. This certificate is not
valid unless countersigned by the Transfer Agent and registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by its duly authorized officers and its
corporate seal to be hereto affixed.
Dated:
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
___________________________________________________ TRANSFER AGENT
AUTHORIZED SIGNATURE AND REGISTRAR
[SEAL] _______________________________________________ ___________________________________________
Secretary President
</TABLE>
<PAGE>
CYNET, INC.
STATEMENT REGARDING AUTHORIZED SHARES OF MORE THAN ONE CLASS AND NOTICE OF
DENIAL OF PREEMPTIVE RIGHTS.
Full statements of the designation, preferences, limitations and
relative rights of the shares of each class of authorized stock of the
Corporation, the variations in the relative rights and preferences of the
shares of any series of Preferred Stock so far as the same have been fixed
and determined, and the authority of the Board of Directors to fix and
determine the relative rights and preferences of each series thereof, and of
the denial of the preemptive rights of shareholders to acquire unissued or
treasury shares of the Corporation, are set forth in the Articles of
Incorporation of the Corporation, as amended, which are on file in the Office
of the Secretary of the State of Texas, copies of which may be obtained,
without charge on written request to the Corporation at its principal place
of business or registered office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable law or regulation: TEN COM - as tenants in common TEN
ENT - as tenants by the entireties JT TEN - as joint tenants with right of
survivorship and not as tenants in common.
<TABLE>
<S><C>
UNIF GIFT MIN ACT - ________________________________________ Custodian ___________________________________________
(Cust) (Minor)
Under Uniform Gifts to Minors Act_______________________________
(State)
UNIF TRF MIN ACT - ____________________________________ Custodian (until age __) _________________________________
(Cust) (Minor)
Under Uniform Transfer to Minor Act ____________________________
(State)
Additional abbreviations may also be used though not in above list.
For value received, _______________________________ hereby sell, assign and transfer unto
</TABLE>
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
___________________________ shares of the capital stock represented by the
within Certificate, and do hereby irrevocably constitute and appoint
____________________ Attorney to transfer the said stock on the books of the
within named Corporation with full power of substitution in the premises.
Dated ____________________________
NOTICE:
<TABLE>
<S><C>
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST X_________________________________________
CORRESPOND WITH THE NAME(S) AS WRITTEN ON (SIGNATURE)
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER. X_________________________________________
(SIGNATURE)
------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM.)
------------------------------------------
SIGNATURE(S) GUARANTEED BY:
</TABLE>
<PAGE>
<TABLE>
<S> <C>
No. CYNET, INC. Shares
COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS CUSIP 23257K 30 5
THIS CERTIFICATE IN TRANSFERABLE IN CHICAGO, IL. SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE NO PAR VALUE SERIES A PREFERRED STOCK OF CYNET, INC., a corporation
organized in the State of Texas, transferable on the books of the Corporation by the holder hereof, in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all of the provisions of the Articles of Incorporation of the Corporation, as
amended, and the Bylaws of the Corporation, as amended, copies of which are on file at the principal office of the
Corporation, to all of which the holder of this certificate assents by acceptance hereof. This certificate is not valid
unless countersigned by the Transfer Agent and registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by its duly authorized officers and its
corporate seal to be hereto affixed.
Dated:
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
___________________________________________________ TRANSFER AGENT
AUTHORIZED SIGNATURE AND REGISTRAR
[SEAL]
________________________________________________ ____________________________________________
Secretary President
</TABLE>
<PAGE>
CYNET, INC.
STATEMENT REGARDING AUTHORIZED SHARES OF MORE THAN ONE CLASS AND NOTICE OF
DENIAL OF PREEMPTIVE RIGHTS.
Full statements of the designation, preferences, limitations and relative
rights of the shares of each class of authorized stock of the Corporation, the
variations in the relative rights and preferences of the shares of any series of
Preferred Stock so far as the same have been fixed and determined, and the
authority of the Board of Directors to fix and determine the relative rights and
preferences of each series thereof, and of the denial of the preemptive rights
of shareholders to acquire unissued or treasury shares of the Corporation, are
set forth in the Articles of Incorporation of the Corporation, as amended, which
are on file in the Office of the Secretary of the State of Texas, copies of
which may be obtained, without charge on written request to the Corporation at
its principal place of business or registered office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable law or regulation:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common.
<TABLE>
<S><C>
UNIF GIFT MIN ACT - ________________________________________ Custodian ___________________________________________
(Cust) (Minor)
Under Uniform Gifts to Minors Act_______________________________
(State)
UNIF TRF MIN ACT - ____________________________________ Custodian (until age __) _________________________________
(Cust) (Minor)
Under Uniform Transfer to Minor Act ____________________________
(State)
Additional abbreviations may also be used though not in above list.
For value received, _______________________________ hereby sell, assign and transfer unto
</TABLE>
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
___________________________ shares of the capital stock represented by the
within Certificate, and do hereby irrevocably constitute and appoint
____________________ Attorney to transfer the said stock on the books of the
within named Corporation with full power of substitution in the premises.
Dated ____________________________
NOTICE:
<TABLE>
<S><C>
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST X_______________________________________
CORRESPOND WITH THE NAME(S) AS WRITTEN ON (SIGNATURE)
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER. X_______________________________________
(SIGNATURE)
----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM.)
----------------------------------------
SIGNATURE(S) GUARANTEED BY:
</TABLE>
<PAGE>
<TABLE>
<S> <C>
No. CYNET, INC. Shares
COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS CUSIP 23257K 40 4
THIS CERTIFICATE IN TRANSFERABLE IN CHICAGO, IL. SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE NO PAR VALUE SERIES B PREFERRED STOCK OF CYNET, INC., a corporation
organized in the State of Texas, transferable on the books of the Corporation by the holder hereof, in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed. This certificate and the shares represented hereby
are issued and shall be held subject to all of the provisions of the Articles of Incorporation of the Corporation, as
amended, and the Bylaws of the Corporation, as amended, copies of which are on file at the principal office of the
Corporation, to all of which the holder of this certificate assents by acceptance hereof. This certificate is not valid
unless countersigned by the Transfer Agent and registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by its duly authorized officers and its
corporate seal to be hereto affixed.
Dated:
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
___________________________________________________ TRANSFER AGENT
AUTHORIZED SIGNATURE AND REGISTRAR
[SEAL] ________________________________________________ ____________________________________________
Secretary President
</TABLE>
<PAGE>
CYNET, INC.
STATEMENT REGARDING AUTHORIZED SHARES OF MORE THAN ONE CLASS AND NOTICE OF
DENIAL OF PREEMPTIVE RIGHTS.
Full statements of the designation, preferences, limitations and relative
rights of the shares of each class of authorized stock of the Corporation, the
variations in the relative rights and preferences of the shares of any series of
Preferred Stock so far as the same have been fixed and determined, and the
authority of the Board of Directors to fix and determine the relative rights and
preferences of each series thereof, and of the denial of the preemptive rights
of shareholders to acquire unissued or treasury shares of the Corporation, are
set forth in the Articles of Incorporation of the Corporation, as amended, which
are on file in the Office of the Secretary of the State of Texas, copies of
which may be obtained, without charge on written request to the Corporation at
its principal place of business or registered office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable law or regulation:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common.
<TABLE>
<S><C>
UNIF GIFT MIN ACT - ________________________________________ Custodian ___________________________________________
(Cust) (Minor)
Under Uniform Gifts to Minors Act_______________________________
(State)
UNIF TRF MIN ACT - _________________________________ Custodian (until age __) ____________________________________
(Cust) (Minor)
Under Uniform Transfer to Minor Act ____________________________
(State)
Additional abbreviations may also be used though not in above list.
For value received, _______________________________ hereby sell, assign and transfer unto
</TABLE>
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
___________________________ shares of the capital stock represented by the
within Certificate, and do hereby irrevocably constitute and appoint
____________________ Attorney to transfer the said stock on the books of the
within named Corporation with full power of substitution in the premises.
Dated ____________________________
NOTICE:
<TABLE>
<S> <C>
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST X___________________________________________________
CORRESPOND WITH THE NAME(S) AS WRITTEN ON (SIGNATURE)
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER. X___________________________________________________
(SIGNATURE)
----------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM.)
------------------------------------------------
SIGNATURE(S) GUARANTEED BY:
</TABLE>
<PAGE>
SETTLEMENT AGREEMENT AND MUTUAL RELEASE IN FULL
This Settlement Agreement and Mutual Release in Full is made on the date
hereinafter set forth between CYNET, INC. (hereinafter referred to as
Company) and RAY C. DAVIS (hereinafter referred to as "Davis").
ARTICLE I
STATEMENT OF FACTS
On or about April 1995, Davis founded Company and was its majority
shareholder, sole director and Chief Operating Officer from Company's
inception until January 28, 1998. During that time Davis accumulated ONE
HUNDRED TWENTY ONE THOUSAND FORTY-THREE and 14/100 DOLLARS ($121,043.14) in
Employee Receivables which are due to Company and remain unpaid as of the
date of this Settlement Agreement and Mutual Release. These Employee
Receivables represent cash payments Company made for certain personal and
non-Company related expenses on behalf of Davis and at Davis' direction.
Furthermore, Company and Davis entered into an Employment Agreement
dated April 13, 1998 whereby Company agreed, among other things, to pay Davis
an annual salary of $150,000 for a five (5) year term.
Wherefore, Company and Davis desire to settle the unpaid Employee
Receivables identified above and to terminate the Employment Agreement effective
August 31, 1998. Pursuant to this desire the parties agree as follows;
ARTICLE II
CONSIDERATION
A. Davis.
The consideration for this Settlement Agreement and Mutual Release in
Full from
Initials: /s/ RD Initials: /s/ VB
---------- -----------
<PAGE>
Davis includes the following:
1. Company's forgiveness of ONE HUNDRED TWENTY-ONE THOUSAND FORTY-THREE
and 14/100 DOLLARS ($121,043.14) Employee Receivables due from and
unpaid by Davis as of the date of this Agreement;
2. Company's execution of this Agreement.
B. Company.
The consideration for this Settlement Agreement and Mutua1 Release in Full
from Company includes the following:
1. Davis waiving his right to remain employed by Company and receive the
stated compensation for the duration of the April 13, 1998 Employment
Agreement and all other provisions of the April 13, 1998 Employment
Agreement remain intact and of full force; and,
2. Davis executing this Agreement.
ARTICLE III
MUTUAL RELEASE
A. Davis' Release in Full.
Davis, in consideration of the matters specified in Article II
hereinabove, the receipt (and anticipated receipt) and sufficiency of which
is hereby acknowledged and confessed, has RELEASED, ACQUITTED AND FOREVER
DISCHARGED, and by these presents does himself, his predecessors, successors
and assigns, RELEASE, ACQUIT, AND FOREVER DISCHARGE, Company and its
affiliated companies or entities, predecessors, successors, assigns,
officers, directors, shareholders, employees, agents, legal representatives,
and attorneys, from all existing and future claims, demands and causes of
action for all existing and future damages and remedies, known
Initials: /s/ RD Initials: /s/ VB
---------- -----------
<PAGE>
or unknown, which have accrued or may ever accrue to Davis, his predecessors,
successors, and assigns, arising out of or in any way related to or connected
with payment of compensation to Davis under the terms of the April 13, 1998
Employment Agreement, including, but not limited to, all claims, demands, and
causes of action of any nature, whether in contract or tort, including
negligence, or arising under or by virtue of any statute or regulation, that
are now recognized by law or that may be created in the future in any manner,
including, but not limited to, by statute, regulation, or judicial decision,
for all losses, damages or remedies of any kind that are now recognized by
law or that may be created or recognized in the future in any manner,
including without limitation by statute, regulation or judicial decision,
including, but not limited to, the following: all actual damages, including
but not limited to lost profits, loss of reputation, loss of opportunity, out
of pocket expenses, loss of earnings, exemplary and punitive damages, all
penalties of any kind, past, present, and future personal injuries, property
damage, loss of consortium, damage to familial relations, ensuing damage,
loss of inheritance, loss of companionship, loss of society and affection,
loss of enjoyment of life, mental anguish, emotional distress, attorney's
fees and pre- and post- judgment interest. This Settlement Agreement and
Mutual Release in Ful encompasses all liability based on legal theories of
every nature.
B. Company's Release in Full.
Company, in consideration of the matters specified in Article II herein
above, the receipt (and anticipated receipt) and sufficiency of which is
hereby acknowledged and confessed, have jointly and severally RELEASED,
ACQUITTED, AND FOREVER DISCHARGED, and by these presents does itself, its
predecessors, successors and assigns, RELEASE, ACQUIT, AND FOREVER DISCHARGE,
Davis and his predecessors, successors, assigns, employees, agents, legal
Initials: /s/ RD Initials: /s/ VB
---------- -----------
<PAGE>
representatives and attorneys, from all existing and future claims, demands
and causes of action for all existing and future damages and remedies, known
or unknown, which have accrued or may ever accrue to Company, its
predecessors, successors, and assigns, arising out of or in any way related
to the ONE HUNDRED TWENTY-ONE THOUSAND FORTY THREE and 14/100 DOLLARS
($121,043.14) Employee Receivables due from Davis to Company as of the date
of this Agreement, including, but not limited to, all claims, demands, and
causes of action of any nature, whether in contract or tort, including
negligence, or arising under or by virtue of any statute or regulation, that
are now recognized by law or that may be created in the future in any manner,
including, but not limited to, by statute, regulation, or judicial decision,
for all losses, damages or remedies of any kind that are now recognized by
law or that may be created or recognized in the future in any manner,
including without limitation by statute, regulation or judicial decision.
This Settlement Agreement and Mutual Release in Full encompasses all liability
based on legal theories of every nature.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
A. Representations and Warranties of Davis.
Davis, on behalf of himself, his successors, and assigns hereby
represents that: (1) he is legally competent to execute this Settlement
Agreement and Mutual Release in Full; (2) he has fully informed itself of the
terms, contents, conditions and effects of the Settlement Agreement and Mutual
Release in Full before executing this instrument; (3) it enters into this
Settlement Agreement and Mutual Release in Full voluntarily; (4) Davis is not
relying on any promise or representation of any kind made to him by Company or
anyone acting for Company except as expressly stated in this instrument; (5) he
has not assigned, pledged or otherwise in any manner whatsoever, sold or
transferred, either by instrument or in writing or otherwise, to any person or
party, any right, title,
Initials: /s/ RD Initials: /s/ VB
---------- -----------
<PAGE>
interest or claim that he has or may have to the future compensation arising
under the April 13, 1998 Employment Agreement by reason of the matters set
forth in Article I hereof, or any matters arising out of or relating thereto;
(6) he fully understands that this is a full, complete, and final Settlement
Agreement and Mutual Release in Full and that the consideration described
above is all that is to be received by Davis as a result of the matters set
forth in Article I hereof.
B. Representations and Warranties of Company.
Company, on behalf of itself, its predecessors, successors, and assigns
hereby represents that: (1) Vincent W. Beale, Sr. is authorized and is legally
competent to execute this Settlement Agreement and Mutual Release in Full on
behalf of Company, (2) Company has fully informed itself of the terms,
contents, conditions and effects of the Settlement Agreement and Mutual Release
in Full before executing this instrument; (3) Company enters into this
Settlement Agreement and Mutual Release in Full voluntarily; (4) Company is not
relying on any promise or representation of any kind made to it by Davis or
anyone acting for Davis except as expressly stated in this instrument; (5)
Company has not assigned, pledged or otherwise in any manner whatsoever, sold or
transferred, either by instrument or in writing or otherwise, to any person or
party, any right, title, interest or claim that it has or may have against Davis
by reason of the matters set forth in Article I hereof, or any matters arising
out of or relating thereto; (7) Company fully understands this is a full,
complete, and final Settlement Agreement and Mutual Release in Full and that the
consideration described above is all that is to be received by Company as a
result of the matters set forth in Article I hereof.
Initials: /s/ RD Initials: /s/ VB
---------- -----------
<PAGE>
Executed in multiple originals on the 28th day of October, 1998.
RAY C. DAVIS CYNET, INC.
"Davis" "Company"
/s/ Ray C. Davis /s/ Vincent W. Beale
- ---------------------------- ----------------------------------
Ray C. Davis Vincent W. Beale, Sr.
Chairman & CEO
CyNet, Inc.
VERIFICATION
STATE OF TEXAS Section
Section
COUNTY OF HARRIS Section
BEFORE ME, the undersigned Notary Public, on this day personally
appeared RAY C. DAVIS and VINCENT W. BEALE, SR, and being by me fully sworn
on their oath, deposed and stated as follows:
We are the parties identified above and we have read the Settlement
Agreement And Mutual Release In Full. The information contained therein is
within our personal knowledge and is true and correct. We have affixed our
signatures above in the presence of this Notary Public as evidence of the
same.
SUBSCRIBED AND SWORN to before me this _____ day of October, 1998.
- -------------------------------------
Signature of Notary Public
- -------------------------------------
Typed or printed name of Notary
Notary Public in and for the State of
Texas My Commission expires on
__________________, 19_______
<PAGE>
STRATEGIC ALLIANCE AGREEMENT
BETWEEN
IXC COMMUNICATIONS SERVICES, INC.
AND
CYNET COMPUTER CORPORATION
<PAGE>
Table of Contents
Strategic Alliance Agreement Terms and Conditions.............................3
Exhibit A - Contracts................................................12
Exhibit B - Alliance Project Process.................................13
2
<PAGE>
STRATEGIC ALLIANCE AGREEMENT
CYNET Computer Corporation a Corporation organized under the laws of the
State of Texas, and, having a place of business at Houston, Texas, and IXC
Communications Services, Inc. ("IXC"), a Corporation organized under the laws
of the State of Delaware and having a principal place of business at 1122
Capital of Texas Highway South, Austin, TX 78746-6426 (hereinafter "IXC"),
agree to enter into this agreement (the "Alliance Agreement") as of the date
of execution below (the "Effective Date").
1. RELATIONSHIP OBJECTIVES
This Alliance Agreement creates a framework of cooperation under which the
parties can explore potential collaborative opportunities for achieving their
respective objectives. The objectives for each party under this Alliance
Agreement are as set forth below:
1.1 IXC'S OBJECTIVES IN ENTERING INTO THIS ALLIANCE ARE TO:
(a) Implement the first, nationwide fiber optic based
network infrastructure utilizing SONET technology for the
transport of data communications traffic at wire-speed, OC-48
transmission rates.
(b) Continue to maximize the investment in IXC's
nationwide, fiber optic network infrastructure by providing
emerging technology solutions, data and Internet products and
services in the small-medium market sector.
(c) Gain market and industry recognition in the data and
Internet services arena in the small-medium market arena by
providing technically sound and profitable products and services.
(d) Become a major Value Added solutions service provider
in the small-medium market arena.
1.2 CYNET's objectives in entering into this alliance are to assist
in the overall growth of IXC's value added service offerings in
the following areas: web site and e-commerce solutions, fax and
internet messaging, list and database services.
2. EXECUTIVE SPONSOR AND MANAGEMENT TEAM
CYNET and IXC each appoint the individuals identified in Exhibit A to this
Alliance Agreement as executive sponsors responsible for monitoring the
relationship, conducting periodic briefings for each other and their teams,
and providing a defined means of communication with other senior executives.
CYNET and IXC also appoint the individual(s) identified in Exhibit A to this
Alliance Agreement as Corporate Champions responsible for the day-to-day
coordination of alliance issues.
/s/ DWK /s/ BBB
---------- -----------
3
<PAGE>
3. SCOPE OF ALLIANCE
The parties anticipate at the time of the execution of this Alliance
Agreement that the scope of the Alliance will include some or all of the
following joint activities and commitments. All projects will be mutually
defined according to the then current policies and practices of IXC's and
CYNET's Marketing Organization and will be the subject of alliance
discussions and ultimately of specific agreements ("Specific Agreements")
according to the process set forth in Section 4 of this Alliance Agreement.
3.1 SERVICE DEVELOPMENT. IXC is currently undergoing rapid product
definition and product development in relation to Internet, VPN, VoIP, FoIP,
and integrated services (voice, video, data, hosting, colocation, messaging,
and E-Commerce). Given this rapid product definition and product development
phase, IXC is interested in having CYNET's team work with IXC's product
management team in the following areas: product definition, product
development, product roll-out, end-to-end service development, and joint
marketing efforts.
Possible joint services include (in order of priority):
(a) IXC-CYNET SEMINAR PROGRAMS: CYNET and IXC will jointly
develop and conduct technical marketing presentations that shall
encompass CYNET's and IXC's sales and marketing objectives in an
effort to brand IXC's value added services. These technical
seminars will be targeted based on the jointly defined and
developed products and services that IXC is rolling out as its
value added services.
(b) BROADCAST FAX: CYNET and IXC will work together to
tailor and package CYNET's Broadcast Fax products and services
for distribution through IXC's Eclipse Sales channel. These
services may enhance CYNET's Broadcast Fax, List Services,
Document Graphics and Copy Writing.
(c) WEB CONTENT DEVELOPER PROGRAM: CYNET agrees to
alpha-test IXC's Web Content Developer Program. IXC's Content
Developer Program is targeted at recruiting and retaining Web
Content Developers. The goal of the Content Developers Program is
to have Content Developers place their servers in IXC collocation
facility and IXC will provide leads to the developer.
(d) Live Auction Service: IXC and CYNET may work together
to develop an interactive auction service targeted to the
existing auction houses that wish to provide live auctions on the
internet. This service will allow views to watch live auctions
and to bid on them.
(e) Interactive Multimedia: IXC and CYNET may work together
to develop and market a fully interactive multimedia solution.
This multimedia solution will include voice, fax, video and
collaborative computing.
(f) VIRTUAL ISP: IXC and CYNET may work together to market
a Virtual ISP service to CYNET's customer base. The Virtual ISP
service will allow executives the ability to quickly enter the
ISP business without the capital
/s/ DWK /s/ BBB
---------- -----------
4
<PAGE>
investment.
(g) MOBILE/WIRELESS DATA: IXC and CYNET may work together
to develop and market a Wireless Data Service using CYNET
wireless modern technology if commercially available.
3.2 JOINT MARKETING AND PROMOTIONAL CAMPAIGNS. The parties agree
to work together in identifying and pursuing promotional activities designed
to enhance the Alliance Agreement. These efforts may include the promotion of
the relationship by each party within their respective organizations, website
promotion, trade show collaboration, newsletter highlights, participation in
public relations activities, use of each other's trademarks or ingredient
marks (collectively "Marks") on specific targeted creative advertising
executions, and press releases and other promotions that benefit both
parties. The initial projects agreed to by the parties are as follows:
(a) JOINT PROMOTION AND PRESS RELEASES: The Parties agree
to develop a public relations plan to support IXC's service and
marketing launch. Communication content will be developed jointly
by the Parties, and will include, but not be limited to,
executive presentations by the Parties, analyst briefings, press
releases, positioning, branding and messaging. Specifically,
CYNET and IXC will develop joint press releases and
communications that communicate the following messages to the
public, subject to any legal or regulatory requirements:
- Announcement of IXC - CYNET Alliance;
- Announcement of IXC - CYNET joint product development.
(b) As part of the IXC - CYNET's Marketing Program, the
parties agree to jointly develop a program to utilize trade shows
and seminars as a vehicle for promoting IXC's products and
services. CYNET will work with IXC to implement IXC - CYNET's
Alliance Tradeshow Program targeted at the Small-Medium Business
market based on the anticipated roll-out of IXC's data and
Internet products and services. The content and location will be
mutually agreed upon by CYNET and IXC project lead.
3.3 TRAINING AND EDUCATION. The parties agree to work together in
identifying training and educational requirements to support the alliance and
to develop a Training and Education plan.
4. ALLIANCE PROJECT PROCESS
4.1 WRITTEN AGREEMENTS. The terms of projects undertaken by the
parties under Section 3.1 (Service Development) will be set forth, in
Specific Agreements which will be identified in an Addendum to this Alliance
Agreement. Each Specific Agreement will contain the applicable information
set forth in the template attached at Exhibit B.
4.2 CUSTOMER OPPORTUNITIES. The parties agree that there may be
potential customer
/s/ DWK /s/ BBB
---------- -----------
5
<PAGE>
opportunities whereby each party would benefit from forming a team to utilize
complimentary capabilities to obtain business in a specific customer
situation. The parties shall utilize the processes set forth in a Master
Teaming Agreement and individual Teaming Agreements.
5. COST SHARING, REIMBURSEMENT OF COSTS OR PAYMENTS BETWEEN ALLIANCE MEMBERS
PENDING SPECIFIC AGREEMENTS
All costs incurred by either party in connection with the Alliance Agreement
shall be the sole responsibility of the party incurring the costs.
6. CONFIDENTIAL INFORMATION AND PUBLICITY
6.1 NON-DISCLOSURE AND USE RESTRICTION. Except as set forth below in
paragraph 6.2, the parties agree to maintain the confidentiality of, and
refrain from using, other than for the express purpose of this Alliance
Agreement or any of the Specific Agreements, confidential or proprietary
information relating to the other party's business, including without
limitation, the contents of this Alliance Agreement, technical processes and
formulas, source codes, names, addresses and information about users and
advertisers, product designs, sales, costs and other unpublished financial
information, product plans, and marketing data; provided that to the extent
that such information is publicly known, already known by, or already in the
possession of the non-disclosing party; is independently developed by the
non-disclosing party; is thereafter rightly obtained by the non-disclosing
party, from a source other than the disclosing party; or is required to be
disclosed by law, regulation, or court order and then only after prompt prior
notification to the other party of such required disclosure; then there shall
be no restriction on the use or disclosure of such information. The
obligations of this paragraph shall be in effect during the term of this
Alliance Agreement and for two (2) years following expiration or termination
hereof.
6.2 PUBLICITY. Any marketing, advertising, promotional materials,
press releases or other public announcements regarding this Alliance
Agreement, or any of the Specific Agreements, shall not be made without prior
written consent of both parties, except as required by law, in which case the
other party shall be consulted, to the extent reasonably practicable, as to
the content and timing of such release, announcement or Statement.
7. RIGHTS IN INVENTIONS
Subject to the terms of any contract executed between IXC and CYNET pursuant
to Section 4, any inventions, discoveries or new technology ("Developments")
developed independently by one of the parties pursuant to this Agreement
shall remain the property of the originating party. Any joint Developments
shall be owned as agreed by IXC and CYNET, and no joint Development shall
commence until such a separate agreement has been executed by authorized
officials of the parties.
8. TERM AND TERMINATION
8.1. The Alliance Agreement commences on the Effective Date and will
continue in effect for three (3) years ("Term").
/s/ DWK /s/ BBB
---------- -----------
6
<PAGE>
8.1 (a) Either party may terminate this Alliance Agreement for any
reason or no reason and at any time by providing thirty (30) days
written notice to the other party.
(b) Either party may terminate this Alliance Agreement upon
written notice to the other party in the event of a material
breach, which remains uncured thirty (30) days after previous
written notice by the non-defaulting party.
8.2 In the event of termination of this Alliance Agreement, all
existing Alliance projects as described in Section 4 shall survive and
continue under the terms specified in each specific agreement until
expiration. Notwithstanding the above, the parties agree that in cases where
it is to the mutual benefit of both parties, Alliance project agreements can
be terminated with mutual consent. Neither party shall have any obligation to
undertake new activities or projects, and all obligations and rights of the
parties shall terminate, with the exception of Sections 6.1 (Confidential
Information) but only to the extent that section provides for survival of
termination 6.2 (Publicity), 7 (Rights in Inventions), 10.4 (Consequential
Damages Waiver) and 10.7 (Dispute Resolution) of this Alliance Agreement,
which provisions shall survive expiration or termination. Upon termination,
the parties agree to promptly return to each other all proprietary and
confidential information of the other party.
9. PURCHASE OF CYNET OR IXC PRODUCTS AND SERVICES
9.1 In the event IXC contemplates purchase of Products or Services,
and CYNET offers such products or services, then IXC shall consider in good
faith but without obligation such proposals or service offerings as CYNET
shall submit to IXC for consideration. IXC agrees, without obligation of any
kind, to consider CYNET.
9.2 In the event CYNET contemplates purchase of Products or Services,
and IXC offers such products or services, then CYNET shall consider in good
faith but without obligation such proposals or service offerings as IXC shall
submit to CYNET for consideration. CYNET agrees, without obligation of any
kind, to consider IXC.
10. GENERAL PROVISIONS
10.1 AMENDMENT. No change, amendment or modification of any provision
of this Alliance Agreement shall be valid unless set forth in a written
instrument signed by both parties.
10.2 ENTIRE AGREEMENT. This Alliance Agreement sets forth the entire
agreement and supersedes any and all prior or contemporaneous agreements and
representations, written or oral, of the parties with respect to the
transactions set forth herein except for the Memorandum of Understanding of
even date herewith. The parties acknowledge that as of the date hereof, no
binding commitments exist between the parties with respect to the subject
matter of this Alliance Agreement except as
/s/ DWK /s/ BBB
---------- -----------
7
<PAGE>
may be provided herein.
10.3 ASSIGNMENT. Neither this Alliance Agreement, nor any rights
hereunder in whole or in part, shall be assignable or otherwise transferable
by either party without the express written consent of the other.
10.4 CONSEQUENTIAL DAMAGES WAIVER. EXCEPT FOR A MATERIAL BREACH OF A
PARTY'S CONFIDENTIALITY OBLIGATION OR A VIOLATION OF A PARTY'S INTELLECTUAL
PROPERTY RIGHTS, NOTWITHSTANDING ANYTHING ELSE TO THE CONTRARY HEREIN,
NEITHER PARTY SHALL BE LIABLE TO THE OTHER UNDER ANY CONTRACT, STRICT
LIABILITY, NEGLIGENCE OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY DIRECT,
INCIDENTAL, DIRECT, PUNITIVE, SPECIAL, OR CONSEQUENTIAL DAMAGES OF ANY KIND,
INCLUDING BUT NOT LIMITED TO ANY LOSS OF USE, LOSS OF BUSINESS OR LOSS OF
PROFIT. ALL LIABILITY UNDER THIS ALLIANCE AGREEMENT IS CUMULATIVE AND NOT PER
INCIDENT. THIS LIMITATION WILL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL
PURPOSE OF ANY LIMITED REMEDY PROVIDED HEREIN.
10.5 CONFLICT. in the event of conflict between this Alliance
Agreement and any Statement of Work under this Alliance Agreement, the
Statement of Work shall control as to the subject matter of the Statement of
Work.
10.6 CONSTRUCTION. In the event that any provision of this Alliance
Agreement conflicts with the law under which this Alliance Agreement is to be
construed, or if any such provision is held invalid by a court with
jurisdiction over the parties to this Alliance Agreement, such provision
shall be deemed to be restated to reflect as nearly as possible the original
intentions of the parties in accordance with applicable law, and the
remainder of this Alliance Agreement shall remain in full force and effect.
10.7 DISPUTE RESOLUTION. Each party agrees that any dispute between
the parties relating to this Alliance Agreement will first be submitted in
writing to a panel of two senior executives of CYNET and IXC, who shall
promptly meet and confer in an effort to resolve such dispute through good
faith consultation and negotiation. Each party's executives shall be
identified by notice to the other party, and may be changed at any time
thereafter also by notice to the other. In the event the executives are
unable to resolve any dispute within thirty (30) days after submission to
them, either party shall be free to seek any available remedies it may have
at law or at equity.
10.8 INDEPENDENT CONTRACTORS. The parties to this Alliance Agreement
are independent contractors. Neither party is an agent, representative, or
CYNET of the other party. Neither party shall have any right, ,power, or
authority to enter into any agreement for, or on behalf of, or incur any
obligation or liability of, or to otherwise bind, the other party. This
Alliance Agreement shall not be interpreted or construed to create an
association, agency, joint venture, or Partnership
/s/ DWK /s/ BBB
---------- -----------
8
<PAGE>
between the parties or to impose any liability attributable to such a
relationship upon either party.
10.9 NO WAIVER. The failure of either party to insist upon or enforce
strict performance by the other party of any provision of this Alliance
Agreement, or to exercise any right under this Alliance Agreement, shall not
be construed as a waiver or relinquishment of such party's right to enforce
any such provision or right in any other instance.
10.10 NOTICE. Any notice, approval, request, authorization, direction,
or other communication under this Alliance Agreement shall be given in
writing directed to the addresses of the parties below, and shall be deemed
to have been delivered and given for all purposes: (i) on the delivery date
if delivered by electronic mail; (ii) on the delivery date if delivered
personally to the party to whom the same is directed; (iii) one (1) business
day after deposit with a commercial overnight carrier with written
verification of receipt; or (iv) five (5) business days after the mailing
date whether or not actually received, if sent by U.S. mail, return receipt
requested, postage and charges prepaid, or any other means of rapid mail
delivery for which a receipt is available to the Contact at the address of
the party to whom the same is directed.
10.11 FORCE MAJEURE. Neither party shall be deemed in violation of this
Alliance Agreement if it is prevented from performing any of the obligations
under this Alliance Agreement by reason of severe weather and stones;
earthquakes or other natural occurrences; strikes or other labor unrest;
power failures; nuclear or other civil or military emergencies; acts of
legislative, judicial, executive or administrative authorities; or any other
circumstances which are not within its reasonable control.
10.12 GOVERNING LAW. This Agreement and any action related thereto
shall be governed, controlled, interpreted and defined by and under the laws
of the State of New York and the United States, without regard to the
conflicts of laws provisions thereof. The Parties specifically disclaim the
UN Convention on Contracts for the International Sale of Goods.
IN WITNESS WHEREOF, the parties hereto have executed this Alliance
Agreement as of the date first above written.
CYNET COMPUTER CORPORATION IXC COMMUNICATIONS SERVICES, INC.
By: /s/ Bernard B. Beale By: /s/ DW Kellermann
--------------------------------- ---------------------------------
Name: Bernard B. Beale Name: Doug Kellermann
Title: Executive VP/COO Title: VP, Value Added Services
Date 8-9-99 Date 8-9-99
-------------------------------- --------------------------------
9
<PAGE>
EXHIBIT A
LIST OF CONTRACTS
AS OF THE EFFECTIVE DATE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
RELATIONSHIP ELEMENT CYNET IXC CONTACT
SYSTEMS CONTACT
- ------------------------------------------------------------------------------
<S> <C> <C>
RELATIONSHIP MANAGEMENT
- ------------------------------------------------------------------------------
Executive Sponsorship Bernard Beale Doug Kellermann
- ------------------------------------------------------------------------------
JOINT
IXC-CYNET PROJECTS
- ------------------------------------------------------------------------------
Broadcast Fax Dave Hearon Ted Wagner
- ------------------------------------------------------------------------------
Public Relations Natalie Gonzales Melissa Jackson
- ------------------------------------------------------------------------------
Joint Marketing Campaigns Bernard Beale Jeff Brown
- ------------------------------------------------------------------------------
Joint Promotion Bernard Beale Vic Ellisor
- ------------------------------------------------------------------------------
IXC-CYNET Natalie Gonzales Jeff Brown
Seminar Program
- ------------------------------------------------------------------------------
Tradeshows/Events Natalie Gonzales Jeff Brown
- ------------------------------------------------------------------------------
</TABLE>
* The contacts designated above are subject to change. Both parties will
promptly notify the other party of any changes and relevant contact
information.
/s/ DWK /s/ BBB
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10
<PAGE>
EXHIBIT B
IXC - CYNET ALLIANCE PR0JECT PROCESS
1. TYPES OF SPECIFIC AGREEMENTS. The parties may enter into Specific
Agreements, which include but are not limited product development,
marketing, services, administration and cooperative studies.
2. CONTENTS OF EACH SPECIFIC AGREEMENT. Each Specific Agreement must contain
(or incorporate as attachments or by reference).
- A reference to the Alliance Agreement;
- Designation of the names, business addresses, and telephone numbers
of the PROGRAM MANAGER of the Specific Agreements;
- Amount, schedule and method of compensation, if any;
- Identification of any development baseline, DELIVERABLES, and/or
services to be provided to either party pursuant to the Specific
Agreements and related license terms; and
- Timetable for performance and completion, including milestones,
schedules and delivery dates, where appropriate.
- In addition, when applicable or appropriate, a Specific Agreement
may contain (or incorporate as attachments or by reference) the
following or any other terms the parties may agree upon:
- Provision for written and oral progress reports by the PROGRAM
MANAGER;
- Acceptance standards for deliverables and or reports, including (1)
documentation, specifications and standards, (2) quality standards,
(3) performance specifications and (4) usability and architecture
requirements;
- A list of any equipment, components, and software to be supplied
for use in connection with the Specific Agreements;
- Any limitation on the locations of performance or storage of IXC or
CYNET confidential information;
- Specifications of the DEVELOPMENT ENVIRONMENT with which any CODE
was prepared;
- A description of the facilities, equipment, MATERIALS or resources
to be provided by IXC and/or CYNET;
- Any agreed to restriction on subcontracting;
- Resource requirements, including training and assignment of key
personnel; and
- The term of the Specific Agreements, and any other termination
provisions.
- A list of trademarks, patents, copyrights, trade secrets, and other
intellectual properties (if any) licensed by one party to the other
under the Specific Agreements, and applicable guidelines and
restrictions on any licenses granted.
- A Statement of the ownership of any intellectual property provided
by a party or created, separately or jointly by the parties, under
each Specific Agreement.
- The signatures of the parties.
3. DEFINITIONS. Unless the context clearly requires otherwise, the capitalized
terms used herein shall have the same meaning as ascribed to the terms
below.
/s/ DWK /s/ BBB
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11
<PAGE>
a. DELIVERABLES - shall mean any MATERIALS or other items which result
from performance under a Specific Agreement and which arc required
to be delivered by virtue of their description or specification in
a Specific Agreement.
b. DERIVATIVE WORK - shall mean a work which is based upon one or more
preexisting works, such as a revision, enhancement, modification,
translation, abridgment, condensation, expansion, or any other form
in which such a preexisting work may be recast, transformed, or
adapted, and which, if prepared without authorization of the owner
of the copyright in such preexisting work, would constitute
copynght infringement under United States law.
c. DEVELOPMENT ENVIRONMENT - shall mean the devices, programming,
documentation, media and other development tools, including
compilers, workbenches, tools, and higher-level or proprietary
languages, used or required by a party for the development,
maintenance and implementation of any DELIVERABLE.
d. MATERIALS - shall mean software code, documentation, other written
materials or tangible media, including machine-readable media with
software code or documentation recorded thereon, hardware, or any
combination of the foregoing.
4. PROCEDURE FOR ENTERING INTO SPECIFIC AGREEMENTS.
a. Either party may propose a Specific Agreement. The other party
shall provide a preliminary response indicating its willingness to
enter into negotiations of the Specific Agreement within 30 days.
b. Each Specific Agreement entered into under this Alliance Agreement
shall become effective only when executed by authorized
representatives of both parties. For CYNET the authorized
representative is the Vice President, Americas. For IXC, the
authorized representative is (To Be Provided).
c. Neither party is obligated hereby to the issuance or execution of
any Specific Agreement. Each Specific Agreement entered into under
this Alliance Agreement shall be construed to incorporate the
provisions of, and be governed by, this Alliance Agreement.
5. PROGRAM MANAGEMENT. Unless otherwise specified in a Specific Agreement, the
PROGRAM MANAGER shall be responsible for the design and development of
DELIVERABLES developed under a Specific Agreement and shall be responsible
for providing customer requirements and testing the DELIVERABLES. All
communications between the parties relating to technical performance and
the preparation and the delivery of DELIVERABLES under a Specific Agreement
shall take place between PROGRAM MANAGERS named in the Specific Agreements.
The additional responsibilities of the PROGRAM MANAGER with respect to the
applicable Specific Agreements are as follows:
/s/ DWK /s/ BBB
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12
<PAGE>
- Arrange meetings, visits and consultations between the parties
concerning matters related to the applicable Specific Agreements;
- Chair periodic status reviews of the applicable Specific
Agreements;
- Coordinate amendments (including documenting and signing or
initialing such amendments) to the Specific Agreements.
- Supervise submission and acceptance of all MATERIALS pursuant to
the Specific Agreements, including the delivery, testing and
acceptance of DELIVERABLES;
- Supervise the transfer of any information in accordance with the
Specific Agreements; and
- Prepare written progress reports pursuant to the provisions of the
Specific Agreements.
6. CHANGES IN COORDINATORS. Either party may replace any of the people
referenced in this Section by delivering written notice of the change to
the other party. The notice must be signed by either the responsible
executives of the party making the change, or by an authorized signatory of
that party. The notice shall set forth the name, business address and
telephone number of the replacement.
7. PROGRESS REPORTS. Unless otherwise provided in the applicable Specific
Agreements, the PROGRAM MANAGER of one party shall provide to the PROGRAM
MANAGER of the other party monthly written progress reports for such
Specific Agreements specifying the current work progress level and
identifying any problems that have been resolved and any problems that are
unresolved, along with a projected date of resolution.
The PROGRAM MANAGER shall also notify the PROGRAM MANAGER promptly in
writing of any factor, event or anticipated event that may affect the
ability to meet the requirements of any Specific Agreements, including
changes in the assignment of its key employees, strikes and labor unrest,
or unavailability of critical resources. Except as provided in the Force
Majeure provisions of this Alliance Agreement, the issuance of such a
notice shall not excuse the party from any default or performance
obligation, unless the other party consents.
8. SUBCONTRACTORS AND EMPLOYEES. Each party agrees that it will use
commercially reasonable efforts to ensure that all employees,
subcontractors or agents engaged by such party who assist with or
contribute to that party's duties, obligations or performance under any
Specific Agreements are aware of and comply with provisions of this
Alliance Agreement.
9. SEVERABILITY. Each Specific Agreement is intended to constitute an
independent and distinct agreement of the parties, notwithstanding the fact
that each shall be construed to incorporate all applicable provisions of
the Alliance Agreement. If any provisions of any contract document is held
by a court of competent jurisdiction to be contrary to law, the remaining
provisions of the contract document will remain in full force and effect
and shall be interpreted, to the extent possible, to achieve the purpose of
this Alliance Agreement and any affected Specific Agreements as originally
expressed without the invalid, illegal or unenforceable provision.
/s/ DWK /s/ BBB
---------- -----------
13
<PAGE>
December 15, 1998
Mr. David Lowe
Vice President - Sales
Brooktrout Technology, Inc.
410 First Avenue
Needham, MA 02194-2722
Dear David:
The CyNet executive team would like to thank you and the Brooktrout staff for
meeting with us last week. We are excited about the potential for two
innovative companies working together to bring about excellent products
suited for the 21st century.
Let me take a moment to summarize the items we mutually agree are present
opportunities for both Brooktrout and CyNet.
1) Brooktrout and CyNet Marketing Efforts: The CyNet marketing team will be
available to frequent selected trade shows with Brooktrout. Arrangements
will be made concerning booth space, etc. that place the two companies in
close proximity for synergistic marketing efforts.
2) Beta Testing: CyNet would like to be a Beta Testing customer for new
Brooktrout technology that pertains to faxing, unified messaging and other
related technology.
3) Technology Roundtable: CyNet would like to have regular joint Technology
Round Table discussions and reviews with our respective Research and
Development, Engineering and Software Development teams. These discussions
could result in additional technology agreements and/or understandings.
As we noted in the meeting last week, our management team believes that the
working relationship developing between CyNet and Brooktrout will be
beneficial for the future growth of both companies. In 1999, CyNet is
looking to grow substantially both internally and though acquisitions. Rapid
deployment of technology will be important to CyNet in the coming year and
having a reliable supplier is very critical to us. We are impressed with the
Brooktrout manufacturing processes and look forward to a long-standing
relationship.
I look forward to discussing with you the items that we left open in our
meeting. If you have any questions, feel free to call me.
Sincerely,
/s/ Bernard B. Beale
- -----------------------------------
Bernard B. Beale
Executive Vice President/COO
<PAGE>
TELESYSTEMS MARKETING, INC. & CYNET, INC.
JOINT SALES AND SUPPORT AGREEMENT
1. This agreement made this day 21 of January, 1999 by and between
TELESYSTEMS MARKETING, INC. ("TSM"), a Texas corporation located at 8401
Westheimer Road, Suite 200, Houston, Texas 77063 and CYNET, INC. ("CYNET"), a
Texas corporation with offices located at 12777 Jones Road, Suite 400,
Houston, Texas 77070.
2. TSM sells and provides Voice Broadcasting, E-mail Broadcasting,
Telephone Conference Calling and Telemarketing Services. TSM agrees to
private label these services in CYNET'S name and to provide a seamless
customer service interface between TSM AND CYNET in support of the TSM
services. Furthermore, TSM agrees to provide CYNET with daily reports on all
services TSM provides to CYNET customers, regular training and marketing
support for the CYNET sales force, 24-hour and 7 days per week customer
service except during pre-arranged holidays, CYNET's private labeled customer
service calls to be answered with a CYNET greeting and no indication from the
customer service personnel as to whether the caller is speaking with a TSM or
CYNET employee, TSM to provide CYNET with a billing file in the format
designated by CYNET and delivered in a digital format (via electronic mail or
magnetic storage medium) by the 5th day of each month. TSM agrees to bill
CYNET at a special discounted rate on the schedule attached hereto and
labeled as Exhibit A. Any and all customer information generated from
CYNET's sales efforts is to remain the exclusive property of CYNET at all
times. TSM agrees to keep this information confidential and to refrain from
using that customer information for any reason other than reporting, billing
and support of CYNET's sales efforts. TSM agrees to promote CYNET's products
and services the way they currently promote their own products and services.
3. CYNET develops, sells and provides Fax Broadcasting, Point-to-Point
Fax, E-mail-to-Fax, Fax-to-E-mail, and other electronic messaging products
and services. TSM desires to resell CYNET's products and services and CYNET
agrees to the reseller arrangement with TSM. CYNET agrees to bill TSM at a
special discounted rate on the schedule attached hereto and labeled as
Exhibit B.
4. The terms of this Agreement shall be subject to review and
modification in writing only, upon the mutual consent of CYNET and TSM.
Unless terminated by the parties in writing or extended by written agreement
for a longer period, this agreement shall continue on a month-to-month basis
under the terms and conditions expressed in this Agreement and as duly
amended.
5. This Letter Agreement is governed by the laws of the State of Texas
and the parties agree that the proper venue for any legal actions in
connection with this Agreement shall be Harris County, Texas.
Initials: /s/ MRB Initials: /s/ BBB
----------- -------------
<PAGE>
6. This Letter Agreement contains the entire understanding and
agreement between CYNET and TSM.
TELESYSTEMS MARKETING SERVICES, INC. CYNET, INC.
"TSM" "CYNET"
By: /s/ M. R. Burns By: /s/ Bernard B. Beale
----------------------------- -------------------------------
M. R. Burns, Founder Bernard B. Beale
Executive Vice President
1/21/99
<PAGE>
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
CyNet, Inc.
Houston, Texas
We hereby consent to the use in the Prospectus constituting
a part of this Registration Statement of our report dated April 23, 1999,
except for footnote 15, which is as of September 13, 1999, relating to the
consolidated financial statements of CyNet, Inc., which is contained in that
Prospectus. Our report contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.
We also consent to the reference to us under the caption
"Experts" in the Prospectus.
BDO Seidman, LLP
Houston, Texas
September 16, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1997 JUN-30-1999 JUN-30-1998
<CASH> 55,007 0 120,018 0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 562,137 0 738,785 0
<ALLOWANCES> 99,104 0 142,180 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 2,650,708 0 2,892,692 0
<PP&E> 3,690,091 0 3,745,587 0
<DEPRECIATION> 1,061,634 0 1,491,196 0
<TOTAL-ASSETS> 5,297,713 0 5,147,083 0
<CURRENT-LIABILITIES> 3,535,776 0 2,523,791 0
<BONDS> 13,980,009 0 13,950,009 0
0 0 0 0
0 0 30,000 0
<COMMON> 4,816,703 0 7,031,703 0
<OTHER-SE> (17,034,775) 0 (18,388,420) 0
<TOTAL-LIABILITY-AND-EQUITY> 5,297,713 0 5,147,083 0
<SALES> 8,947,732 4,960,355 4,534,254 4,243,585
<TOTAL-REVENUES> 8,947,732 4,960,355 4,534,254 4,243,585
<CGS> 6,069,184 4,490,505 2,322,766 3,092,689
<TOTAL-COSTS> 7,108,910 8,428,720 3,410,751 2,988,470
<OTHER-EXPENSES> 126,278 (56,821) 128,780 (2,502)
<LOSS-PROVISION> 349,327 245,638 92,304 240,430
<INTEREST-EXPENSE> 103,851 2,000 76,548 0
<INCOME-PRETAX> (4,356,640) (7,762,863) (1,328,043) (1,835,072)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (4,356,640) (7,762,863) (1,328,043) (1,835,072)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (4,356,640) (7,762,863) (1,328,043) (1,835,072)
<EPS-BASIC> (.19) (.60) (.05) (.08)
<EPS-DILUTED> (.19) (.60) (.05) (.08)
</TABLE>
